Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA

35 Pages Posted: 12 Jun 2008

See all articles by Kent Matthews

Kent Matthews

Cardiff University Business School

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Ruthira Naraidoo

affiliation not provided to SSRN

Date Written: May 2008

Abstract

This paper develops a political economy model of multiple unemployment equilibria to provide a theory of an endogenous natural rate of unemployment. This model is applied to the UK and the US interwar period which is remembered as the decade of mass unemployment. 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 reduced form results obtained confirm a pattern of unemployment behaviour in which unemployment moves between high and low equilibria in response to shocks.

Keywords: "vicious" and "virtuous" circles, bootstrapping, Equilibrium unemployment, forecasting, Political economy

JEL Classification: E24, E27, P16

Suggested Citation

Matthews, Kent and Minford, Patrick and Naraidoo, Ruthira, Vicious and Virtuous Circles - The Political Economy of Unemployment in Interwar UK and USA (May 2008). , Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1143201

Kent Matthews (Contact Author)

Cardiff University Business School ( email )

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Patrick Minford

Cardiff University Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 2087 5728 (Phone)
+44 29 2087 4419 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ruthira Naraidoo

affiliation not provided to SSRN

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