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Okun´s law in Colombia: a non-linear cointegration

Luz Florez (), Karen L. Pulido-Mahecha and Mario Ramos-Veloza
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Karen L. Pulido-Mahecha: Universidad Nacional

Borradores de Economia from Banco de la Republica de Colombia

Abstract: This paper identifies Okun´s law in Colombia between 1984 and 2016 using a Vector Error Correction Model (VECM) as there is evidence of a long-term relationship between the unemployment rate and the GDP. Results suggest that after a one percent increase in GDP, the unemployment rate is reduced by 0.45 percentage points in the long run (after sixteen quarters). In addition we inspect for nonlinearities using a threshold cointegration model (TVECM). Results suggest the existence of two regimes a low and a high one. The high regime starts at the late nineties and is associated with a more flexible labor market. Under this regime, a 1% increase in GDP, reduces the UR 0.6 percentage points after eighteen quarters. By contrast, under the low regime the response is 0.2 percentage points after eight quarters.

Keywords: Okun´s law; co-integration; nonlinearities (search for similar items in EconPapers)
JEL-codes: E24 J3 J4 (search for similar items in EconPapers)
Pages: 27
Date: 2018-02
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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:1039

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