Study Regarding the Influence of Interest Rate on Unemployment Rate in Jamaica Using a Correlation Indicator

TOPIC: Study regarding the influence of Interest Rate on Unemployment rate in Jamaica using a correlation indicator.

Royan C. Campbell

Northern Caribbean University

First Draft

February 2014

ABSTRACT

The interrelation between interest rate and unemployment rate is an important issue that has been studied mainly for developed countries. However, little attention has been devoted to inquiries on similar impact in small open economies. This paper contributes to the literature by providing empirical evidence of the influence of interest rate on unemployment rate in Jamaica. It investigates the causality between unemployment and interest rate in Jamaica for the period 1998 to 2013. During my research I discovered that there is a statistically significant relationship between interest rate and unemployment rate. These findings support the hypothesis presented by many economists in a number of economic literatures that there is a statistical significant relationship between unemployment rate and interest rate in developed and also in emerging economies. I was able to support the evidence that interest rate influences unemployment rate in Jamaica, which is similar to Carruth, et al. (1998) research results for the U.S. The Research also provides measure and quantifies the impact of interest rate on unemployment rate in Jamaica.

INTRODUCTION

Unemployment is an important macroeconomic and political problem all economies confront. Due to its social and economic consequences, it is essential for policy makers to identify the factors that are affecting the unemployment rate the most. Furthermore, policy makers must also realize that the dynamics of unemployment and other factors may differ among countries at different stages of economic development. Developing countries are known to have higher unemployment rates than developed countries, with the former having higher economic growth rates than the latter. High level of unemployment has been also observed in...