Interest rate volatility and its effect on unemployment in European Union and the United States

Abstract

In a market oriented economy, the increase in (industrial) production will increase demand
for labor and unemployment will decline. The same will happen with an expansionary monetary
and fiscal policy. The risk is expected to have a positive (workers will supply more labor) or a
negative (firms will demand less labor) effect on employment. Here, a simple expectations-
augmented Phillips curve, combined with the equation of exchange and through an IS
curve, gives the optimal unemployment rate. A GARCH (p, q) process is used to determine the
risk (measured with the volatility of the real interest rate) in our economy. The results show that
the EU country-members are different from each other and distinct from the U.S. market-
oriented economy. Consequently, the current European Union is not working as a free market economy and might be required more time to adjust in the future with all these tremendous.
structural, cost, urbanization, and demographic changes and its rapid expansion with ten new
members from this year.