Investment, current account, and the long swings of unemployment

Hoon, H.T. and Katsimi, M. and Zoega, Gylfi (2018) Investment, current account, and the long swings of unemployment. Working Paper. Birkbeck, University of London, London, UK.

Abstract

We estimate the relationship between investment and unemployment over the time period 1960-2015 in 20 OECD countries. While neoclassical growth theory typically assumes full employment – with no effect of investment on unemployment – we find that over our sample period covering more than five decades, a statistically significant negative relationship does exist: when investment fell, unemployment increased. When the time period is broken down into two sub-periods to take account of the Great Recession, we find that the estimated coefficient of investment is slightly smaller when the period 2001-2015 is added to the 1960-2000 period. We also find a positive effect of the current account surplus on unemployment that very likely works through investment. A non-monetary model shows how an increase in policy uncertainty that sharply contracts investment and raises unemployment can lead to an increase in current account surplus.

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