Unemployment and Inflation in Western Europe: Solution by the Boundary Integral Method

28 Pages Posted: 30 Mar 2009

See all articles by Ivan Kitov

Ivan Kitov

Russian Academy of Sciences (RAS) - Institute for the Geospheres Dynamics

Oleg Kitov

University of Warwick

Date Written: March 29, 2009

Abstract

Using an analog of the boundary element method in engineering and science, we analyze and model unemployment rate in Austria, Italy, the Netherlands, Sweden, Switzerland, and the United States as a function of inflation and the change in labor force. Originally, the model linking unemployment to inflation and labor force was developed and successfully tested for Austria, Canada, France, Germany, Japan, and the United States. Autoregressive properties of neither of these variables are used to predict their evolution. In this sense, the model is a self-consistent and completely deterministic one without any stochastic component (external shocks) except that associated with measurement errors and changes in measurement units. Nevertheless, the model explains between ~65% and ~95% of the variability in unemployment and inflation. For Italy, the rate of unemployment is predicted at a time horizon of nine (!) years with pseudo out-of-sample root-mean-square forecasting error of 0.55% for the period between 1973 and 2006. One can expect that the unemployment will be growing since 2008 and will reach ~11.4% [ plus/minus 0.6 %] near 2012. After 2012, unemployment in Italy will start to descend.

Keywords: unemployment, inflation, labor force, boundary integral method, prediction, Western Europe

JEL Classification: J64, J21, J11, E24, E31

Suggested Citation

Kitov, Ivan O. and Kitov, Oleg, Unemployment and Inflation in Western Europe: Solution by the Boundary Integral Method (March 29, 2009). Available at SSRN: https://ssrn.com/abstract=1369950 or http://dx.doi.org/10.2139/ssrn.1369950

Ivan O. Kitov (Contact Author)

Russian Academy of Sciences (RAS) - Institute for the Geospheres Dynamics ( email )

Leninsky prospect 38/1
Moscow, Moscow 119334
Russia

HOME PAGE: http://idg3.chph.ras.ru

Oleg Kitov

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

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