Memoranda The Relation Between Unemployment and Interest Rate : Some international evidence

In Bierens (1987) a Granger causal relation was found between unemployment and the interest rate for the Netherlands. In the present paper we will investigate whether there exists a simüar Granger causal relation between unemployment and interest rate for a number of other countries. It appears that, with our ARMAX modeling approach, this relationship is not confined to the Netherlands, but also holds for the USA, Canada, Japan, Germany, the UK and France. For these countries the interest rate is the main explanatory variable, together with industrial production (the latter with one exception), whereas for most countries the wage rate is of minor or no importance as a determinant of unemployment. A number of economie theories can explain these phenomena of which the revenue maximization theory of Baumol (1959) augmented with a flexible labor effort rate seems quite realistic. Helpful comments of two anonymous referees are greatfully acknowledged.