Interwar Unemployment in the UK and the US: Old and New Evidence

Naveen Srinivasan and Pratik Mitra

South Asian Journal of Macroeconomics and Public Finance, 2016, vol. 5, issue 1, 96-112

Abstract: Two contrasting views have dominated the research on unemployment during the interwar years. The conventional Keynesian view attributes the persistence of high unemployment in the UK and the US during the interwar period to sluggish adjustment of nominal wages to demand shocks. In contrast, equilibrium models of unemployment suggest that the natural rate is itself endogenous, determined by technological, institutional as well as demographic factors and is therefore not necessarily constant over time. According to this view, unemployment may remain elevated because some (or all) of the driving forces are persistent. How do we discriminate between these competing explanations? To this end, we estimate a time-varying parameter (TVP) model of the unemployment rate for the UK and the US. The Kalman filter estimates of the natural rate of unemployment suggest that most macroeconomic activity during the interwar period reflects persistent movements in steady state, not from steady state. We conclude that the observed persistence in unemployment appears to be consistent with multiple equilibria models and models with an endogenous natural rate. JEL Classification: E24, J64

Keywords: Interwar unemployment; persistence; natural rate of unemployment; Kalman filter (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:sae:smppub:v:5:y:2016:i:1:p:96-112

DOI: 10.1177/2277978716631706

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