''ABSTRACT: An alarming legacy of the austerity programs in the euro area is the vast
disinvestment that has taken place over the recent years, and especially so in the peripheral
economies. Unless it is quickly reversed, disinvestment not only hinders long-term growth but
also undermines the prospects of a gradual reduction of unemployment and risks further
imbalances in, and threats to, the monetary union. Combining a neoclassical Diamond model
with labour market imperfections, the paper shows that unemployment is a function of capital
investment under either CES or Cobb-Douglas production functions. A cross-section estimate
for the euro area economies confirms the theoretical findings.
Keywords: euro area, investment, unemployment, capital-labour..
disinvestment that has taken place over the recent years, and especially so in the peripheral
economies. Unless it is quickly reversed, disinvestment not only hinders long-term growth but
also undermines the prospects of a gradual reduction of unemployment and risks further
imbalances in, and threats to, the monetary union. Combining a neoclassical Diamond model
with labour market imperfections, the paper shows that unemployment is a function of capital
investment under either CES or Cobb-Douglas production functions. A cross-section estimate
for the euro area economies confirms the theoretical findings.
Keywords: euro area, investment, unemployment, capital-labour..
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