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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. 

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