The Equilibrium Rate of Unemployment and the Real Exchange Rate: An Unobserved Components System Approach

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe set up and estimate a structural unobserved components open economy model for the rate of unemployment and the real exchange rate in Sweden. This approach enables us to simultaneously determine changes in both cyclical and equilibrium rates. Our results show that the Natural Rate/NAIRU has increased by approximately 1.5 percentage points since the 1970s, driven by a depreciation of the equilibrium exchange rate, changes in taxes, active labor market policies and demographic factors. Thus, the results indicate that the dramatic changes in the Swedish unemployment rate during the 1990s mainly was a cyclical phenomenon. After five devaluations in the 1970s and early 1980s the krona was allowed to float on 19 November 1992. The depreciating trend continued during the floating rate period. Our model successfully explains this development as being driven by changes in terms of trade, demographics and structural government deficits. The change in the rate of inflation is found to be quite sensitive to the unemployment gap. An increase in cyclical unemployment by 1 percentage point will reduce inflation by approximately 0.6 percentage points within a year.

The effect of real exchange rate on unemployment

“…These results verified the findings of Ranjbar and Moazen (2009), Behnamian (2012), Frenkel (2004), and He (2013) who stated that it was not possible to reject the negative effects of real exchange rate on unemployment. However, these results were contrary to the findings of Lindblad and Sellin (2008), Feldmann (2011), Chimnani et al (2005, and Zhou (2010) who stated that exchange rate had positive effect on unemployment rate. On the other hand, the findings of the present study verified Chang (2011) and Nyahokwe and Ncwadi's (2013) findings claiming the presence of a longrun relationship between unemployment and exchange rate.…”

“…Ranjbar and Moazen (2009), Behnamian (2012), Frenkel (2004), and He (2013) predicted negative relationship between these two variables of economy. However, Lindblad and Sellin (2008), Feldmann (2011), Chimanani, Bhutto, Butt, Sheikh, and Devi (2012), and Zhou (2010) assumed positive relationship between exchange rate and unemployment. Ranjbar and Moazen (2009) investigated the factors affecting unemployment in eight countries of the Organization of Islamic Cooperation (OIC), namely Iran, Egypt, Indonesia, Kazakhstan, Malaysia, Morocco, Pakistan, and Turkey using the data of 7 years from 1999 to 2006.…”

“…Therefore, some researchers found positive relationship between real exchange rate and unemployment. Lindblad and Sellin (2008) set up and evaluated a structural unobserved components open economy model for the unemployment rate and the real exchange rate. This approach empowered them to simultaneously determine changes in both cyclical and equilibrium rates in these two variables.…”

Time Series Analysis About The Relationship Between Foreign Trade and Exchange Rate in Turkish Economy

“…Therefore the empirical studies may include differences and reach different conclusions (Lindblad & Sellin, 2003). However, one point is almost universally accepted that uncertainties in exchange rates adversely affect the foreign trade (Pozo, 1992;Arize, Malindretos, & Kasibhata, 2003;Chowdhury, 1993;Kenen & Rodrik, 1986).…”

Using a New Open Economy Macroeconomics Model to Make Real Nominal Exchange Rate Forecasts

“…The Swedish real effective exchange rate has been modelled recently by Alexius and Nilsson (2000), Bergvall (2002), Lindblad and Sellin (2003), Nilsson (2004), and Lane (2006). Except for the first study, a common finding is that an improvement in the terms of trade lead to an appreciation of the real exchange rate.…”