Vicious and virtuous circles : the political economy of unemployment in interwar UK and USA

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Authors

Matthews, Kent
Minford, Patrick
Naraidoo, Ruthira

Journal Title

Journal ISSN

Volume Title

Publisher

Elsevier

Abstract

This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment for the UK and the US interwar period. The theory here sees the natural rate and the associated path of unemployment as a reaction to mainly demand shocks 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 confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks.

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Keywords

Equilibrium unemployment, Political economy, Vicious and virtuous circles, Bootstrapping, Forecasting

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Citation

Matthews, K, Minford, P & Naraidoo, R 2008, 'Vicious and virtuous circles: the political economy of unemployment in interwar UK and USA', European Journal of Political Economy, vol. 24, no. 3, pp. 605-614. [http://www.elsevier.com/wps/find/journaldescription.cws_home/505544/description]