Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA

Kent Gerard Matthews (), A. Patrick L. Minford and Ruthira Naraidoo ()

No 6839, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment. This model is applied to the UK and the US interwar period which is remembered as the decade of mass unemployment. The theory here sees the natural rate and the associated path of unemployment as a reaction to shocks (mainly demand in nature) and the institutional structure of the economy. The channel through which these two forces feed on each other is a political economy process whereby voters with limited information on the natural rate react to shocks by demanding more or less social protection. The reduced form results obtained confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks.

Keywords: "vicious" and "virtuous" circles; bootstrapping; Equilibrium unemployment; forecasting; Political economy (search for similar items in EconPapers)
JEL-codes: E24 E27 P16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-pol
Date: 2008-05
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Related works:
Working Paper: Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA (2006)
Working Paper: Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA (2006)
Working Paper: Vicious and Virtuous Circles - the Political Economy of Unemployment in Interwar UK and USA (2006)
Journal Article: Vicious and virtuous circles -- The political economy of unemployment in interwar UK and USA (2008)
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