The political economy of unemployment and threshold effects. A nonlinear time series approach

Ruthira Naraidoo, A. Patrick Minford and Ioannis Venetis ()

No KERP 2006/21, Keele Economics Research Papers from Centre for Economic Research, Keele University

Abstract: This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment using a nonlinear threshold model for a number of OECD countries. 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 empirical results obtained confirm the existence of multiple and ``moving'' equilibria (``vicious'' and ``virtuous'' circles). The nonlinear model is compared with a linear version with the nonlinear framework always exhibiting superior in-sample fit and generally better out-of-sample predictive accuracy. The conclusion is that macroeconomics and supply side policies feed on each other via the political economy.

Keywords: Equilibrium unemployment; political economy; threshold model; forecasting (search for similar items in EconPapers)
JEL-codes: E24 E27 P16 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2006-10
New Economics Papers: this item is included in nep-ets, nep-for, nep-mac and nep-pol
Note: The authors would like to thank James Davidson, Costas Milas, David Peele, Ivan Paya and workshop participants for helpful comments.
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.keele.ac.uk/depts/ec/wpapers/kerp0621.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kee:kerpuk:2006/21

Ordering information: This working paper can be ordered from
Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

Access Statistics for this paper

More papers in Keele Economics Research Papers from Centre for Economic Research, Keele University Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom. Contact information at EDIRC.
Bibliographic data for series maintained by Martin E. Diedrich ( this e-mail address is bad, please contact ).