7/13/11

Okun's law integrated: Spain

We have estimated a version of Okun’s law for the USA and France. We have applied a LSQ technique to the integral version of Okun’s law: 
u(t) = u(t0) + bln[G/G0] + a(t-t0)  (1)  

where u(t) is the rate of unemployment at time t, G is the level of real GDP per capita, a and b are empirical coefficients. 

For Spain, we have a model estimated by a simple eye-fit. Here we re-estimate the model with a structural break  somewhere between 1980 and 2000.  The best-fit (dynamic) model minimizing the RMS error of the cumulative model (1) is as follows:

du = -0.406dlnG + 2.00, t<1995
du = -1.11dlnG + 1.54, t>1994    (2)

This model suggests a big shift in the slope and a smaller change in the intercept around 1995. Figure 1 depicts the observed and predicted curves. The agreement is very good, especially after 1995. 

The cumulative form of the dynamic Okun’s law is characterized by standard error of 1.71% for the period between 1971 and 2010 (0.96% after 1995). The average rate of unemployment for the same period is 13.6% (14.6% after 1995) with a standard deviation of the annual increment of 2.12%.



Figure 1.  The observed and predicted rate of unemployment in the Spain between 1971 and 2010. 

No comments:

Post a Comment

The Fed rate will not likely be falling soon and fast

In 2022, we  wrote in this blog  about the strict proportionality between the CPI inflation and the actual interest rate defined by the  Boa...