The Modigliani 'Puzzle'
IoES Working Paper No. W01:05
8 Pages Posted: 17 Aug 2001
Date Written: February 2002
Medium- to long-term changes in unemployment appear to be closely correlated with medium- to long-term changes in private investment. This becomes a puzzle once we abandon the Keynesian framework as an explanation for medium-term movements in unemployment and replace it with the natural-rate framework of Friedman and Phelps. It also opens up the possibility that factors affecting private saving and investment may impinge directly on the natural rate of unemployment. One such factor is the age structure of the population. We explore these possibilities and find a surprisingly robust medium- to long-run relationship between investment and unemployment both over time and across countries.
Keywords: investment, unemployment, age-structure
JEL Classification: J1, E2
Suggested Citation: Suggested Citation