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    Investment and the long swings of unemployment

    Zoega, Gylfi and Katsimi, M. and Teck Hoon, H. (2022) Investment and the long swings of unemployment. Economics of Transition and Institutional Change , ISSN 2577-6983.

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    We estimate the medium-term relationship between investment and unemployment over the period 1960-2017 in 20 OECD countries, a period that includes the years of the Great Recession. While neoclassical growth theory typically assumes full employment – with no effect of investment on unemployment– and New-Keynesian models assume that such a relationship only exists in the short term at business cycle frequencies, we find that over our sample period covering more than five decades a statistically significant negative relationship does exist: in decades when investment fell, unemployment increased. Panel estimation, using a measure of stock market volatility as an instrument for investment, confirms the negative relationship between investment and unemployment. High stock market volatility and low investment are associated with high unemployment, other things equal. The evidence supports both Keynes’ ideas about an unemployment equilibrium as well as more recent investment-based theories of the natural rate of unemployment.


    Item Type: Article
    Keyword(s) / Subject(s): Long swings of unemployment, investment, current account, Great Recession
    School: Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School
    Depositing User: Gylfi Zoega
    Date Deposited: 06 Dec 2022 15:36
    Last Modified: 02 Aug 2023 18:19


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