- 10 August 2016
- OCCASIONAL PAPER SERIES - No. 175Details
- This paper revisits the empirical relationship between unemployment and output, and its evolution following the financial crisis of 2008, with the aim of drawing potential consequences for labour market modelling strategies in place within the European System of Central Banks (ESCB). First, the negative correlation between output and unemployment (Okun’s law) at cyclical frequencies is found to be a robust feature of macro data across time, countries and identification schemes. Focusing on the euro area, the financial distress seems to have altered the dynamics of output and unemployment mainly at lower frequencies, interpreted as trend developments by the statistical filters used in the analysis. Looking at the implications for modelling strategies, we propose an extension of the standard labour search and matching model in which financial frictions impinge directly on the labour market rather than on the capital market, opening the way to protracted and lagged response of employment after a “financial” crisis. In terms of policy implications, the importance of the interplay between financial and labour market frictions in trend developments should be read as strong support for an ambitious structural reform agenda in Europe, so as to make our labour (and goods) markets more flexible and resilient.
- JEL Code
- E10 : Macroeconomics and Monetary Economics→General Aggregative Models→General
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
J64 : Labor and Demographic Economics→Mobility, Unemployment, Vacancies, and Immigrant Workers→Unemployment: Models, Duration, Incidence, and Job Search
- 29 October 2018
- OCCASIONAL PAPER SERIES - No. 215Details
- The article analyses recent developments in business investment for a large group of EU countries, using a broad set of analytical tools and data sources. We find that the assessment of whether or not investment is currently low varies across benchmarks and countries. At the euro area level and for most countries, the level of business investment is broadly in line with the level of overall activity. However rates of capital stock growth have slowed down since the crisis. The main cyclical determinants of investment developments in the euro area include foreign and domestic demand, uncertainty and financial conditions. Uncertainty seems to have played a negative role during the financial and sovereign debt crises; however, given its low levels more recently, it has not acted as a drag on business investment overall during the recovery. Credit constraints appear to have hindered investment during the twin crises, especially in stressed countries. Aside from cyclical developments, important secular factors – relating to demographics, the changing nature and location of production, and the business environment – have influenced investment. Another factor that may have amplified the decline in private investment, particularly in countries that were hit hardest by the sovereign debt crisis, is the low level of public investment. This is because when public investment enhances the productivity of the private sector, there may be positive spillovers from the former to the latter, including across countries. Finally, intra-sector capital misallocation, measured as the within-sector dispersion across firms in the marginal revenue product of capital, has been increasing in Europe since 2002, which may in turn have exerted a significant drag on total factor productivity dynamics, and hence on aggregate output growth.
- JEL Code
- E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E62 : Macroeconomics and Monetary Economics→Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook→Fiscal Policy
D24 : Microeconomics→Production and Organizations→Production, Cost, Capital, Capital, Total Factor, and Multifactor Productivity, Capacity
D61 : Microeconomics→Welfare Economics→Allocative Efficiency, Cost?Benefit Analysis