Kiel Working Papers, Kiel Institute for World Economics
No 1347:
Distance to Frontier and the Big Swings of the Unemployment Rate: What Room is Left for Monetary Policy?
Hian Teck Hoon and Kong Weng Ho
Abstract: This paper builds upon Hoon and Phelps (1992, 1997) to ask
how much of the evolution of the unemployment rate over several decades in
country can be explained by real factors in an equilibrium model of the
natural rate where country's productivity growth depends upon its distance
from the world's technological leader. One motivating contemporary example
includes the evolution of unemployment rates in Europe as it recovered from
the second world war and caught up technologically to the US. Another
example that may be less familiar to many people is Singapore (the second
fastest growing economy from 1960 to 2000 in Barro's data set of 112
countries) that is best thought of as catching up to the world's
technological leaders (the G5 countries with whom it trades extensively and
from where it receives substantial foreign direct investments) and that saw
its unemployment rate go down from double-digit levels in the early 1960's
to the low 2 to 3 percent in the late 1990's. How much of the big movements
in the unemployment rate can be explained by non-monetary factors in a
model of an endogenous natural rate exhibiting both monetary neutrality and
super-neutrality? What room is left for monetary policy in explaining the
movements of the unemployment rate? The paper develops the theory and seeks
to ask how much non-monetary factors can quantitatively account for the
evolution of the unemployment rate.
41 pages, June 2007
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