Unemployment, Investment and Global Expected Returns: A Panel FAVAR Approach

Ronald Smith () and Gylfi Zoega
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Gylfi Zoega: Department of Economics, Mathematics & Statistics, Birkbeck

No 524, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: We consider the hypothesis that a common factor, global expected returns, drives unemployment and investment in 21 OECD countries over the period 1960-2002. We investigate this hypothesis using a panel-factor augmented-vector autoregression (FAVAR). We first estimate the common factors of unemployment and investment by principal components and show that the first principal component of unemployment is almost identical to that of investment and that they both show the pattern one would expect of a rate of return as indicated by long interest rates. We then estimate panel FAVARs to measure the dynamic impact of the global factors. Investment appears to drive unemployment and – allowing for a moving natural rate of unemployment driven by the global factor – produces much faster adjustment by unemployment.

Keywords: Investment; unemployment; principal components. (search for similar items in EconPapers)
JEL-codes: J1 E2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2005-11
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