Climbing to the top? Foreign Direct Investment and Property Rights.

This paper operates at the interface of the literature on the impact of foreign direct investment (FDI) on host countries, and the literature on the determinants of institutional quality. We argue that FDI contributes to economic development by improving institutional quality in the host country and we attempt to test this proposition using a large panel data set of 70 developing countries during the period 1981 and 2005, and we show that FDI inflows have a positive and highly significant impact on property rights. The result appears to be very robust and is and not affected by model specification, different control variables, or a particular estimation technique. As far as we are aware this is the first paper to empirically test the FDI – property rights linkage.

Unemployment: natural rate epicycles or hysteresis?

This paper argues that the natural rate of unemployment hypothesis, in which equilibrium unemployment is determined by “structural” variables alone, is wrong: it is both implausible and inconsistent with the evidence. Instead, equilibrium unemployment is haunted by hysteresis. The curious history of the natural rate hypothesis is considered, curious because the authors of the hypothesis thought hysteresis to be relevant. The various methods that have been used to model hysteresis in economic systems are outlined, including the Preisach model with its selective, erasable memory properties. The evidence regarding hysteresis effects on output and unemployment is then reviewed. The implications for macroeconomic policy, and for the macroeconomics profession, are discussed.