About the Project
Purpose
An extensive strand of literature investigates two main hypotheses on unemployment behaviour. The first hypothesis suggested by Phelps (1967) and Friedman (1968) is natural rate of unemployment (NAIRU) which suggests that unemployment rate is stationary as it converges to a natural rate, NAIRU, in long run i.e. any deviations from natural rate is temporary. The second hypothesis suggested by Blanchard and Summers (1987) is the hysteresis which implies that unemployment rate has a unit root i.e. any deviations from natural rate will be permanent.
Using unit root test, literature provides mixed evidence about the behaviour of unemployment across countries (Jaeger and Parkinson, 1994, Camarero and Tamarit,, 2004 and Cheng et al. 2012). However, literature underestimates the factors which can affect the unemployment behaviour.
This research will explore whether the quality of institution can affect the behaviour of unemployment. Consequently, this research aims to better understand of the causes of hysteresis phenomenon through investigating the nexus between institutional quality and unemployment. The project will compare several types of institution, educational, financial and political, in order to test which type has more powerful impact on unemployment behaviour.
Method
Using unemployment and institutional quality data, the project will apply unit root techniques to assess the relationship between institutional quality and hysteresis phenomenon.
References
References
Blanchard, O.J. & Summers, L.H., (1987). Hysteresis in unemployment. European Economic
Review 31, 288–295.
Camarero, M., & Tamarit, C. (2004). Hysteresis vs. natural rate of unemployment: new evidence for OECD countries. Economics Letters, 84(3), 413-417.
Cheng, K. M., Durmaz, N., Kim, H., & Stern, M. L. (2012). Hysteresis vs. natural rate of US unemployment. Economic Modelling, 29(2), 428-434.
Friedman, M., (1968). The role of monetary policy. The American Economic Review 58, 1–17
Jaeger, A., & Parkinson, M. (1994). Some evidence on hysteresis in unemployment rates. European economic review, 38(2), 329-342.
Phelps, E., (1967). Phillips curves, expectations of inflation and optimal unemployment over time. Economica 34, 254–281