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The Endogeneity of the Natural Rate of Growth in the Regions of Italy

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  • Matteo Lanzafame

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Abstract

Following León-Ledesma and Thirlwall (2002a), this paper investigates the extent to which the natural rate of growth of the Italian regions is endogenous, in the sense that it is affected by actual growth. The estimation framework is based on one version of the cyclical relationship between unemployment and output growth known as Okun's Law [Okun (1962)]. Econometrically, the main hypothesis being examined regards the presence of non-linearities in Okun's Law, which can be interpreted as structural shifts in the natural growth rate. Using annual data over the period 1977-2003, we find strong support for the endogeneity hypothesis when applying the theory-based estimation methodology proposed by LLT. The results are less clear-cut when we switch to a data-driven approach centred on the Hansen's (1997) testing procedure for threshold models. Furthermore, in line with recent findings in the literature, our analysis provides evidence of asymmetries in Okun's Law, suggesting that unemployment turns from counter-cyclical when growth is slow to acyclical or even (in some cases) pro-cyclical in booms.

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Bibliographic Info

Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 0606.

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Date of creation: Dec 2006
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Handle: RePEc:ukc:ukcedp:0606

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
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Keywords: Endogenous growth; Okun's Law; Italian regions;

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  1. Blackburn, Keith, 1999. "Can Stabilisation Policy Reduce Long-Run Growth?," Economic Journal, Royal Economic Society, vol. 109(452), pages 67-77, January.
  2. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche 9421, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  3. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
  4. Miguel A. León-Ledesma & A. P. Thirlwall, 1998. "The Endogeneity of the Natural Rate of Growth," Studies in Economics 9821, Department of Economics, University of Kent.
  5. Barro, R.J., 1989. "Economic Growth In A Cross Section Of Countries," RCER Working Papers 201, University of Rochester - Center for Economic Research (RCER).
  6. Miguel Leon-Ledesma & Anthony P. Thirlwall, 2000. "Is the natural rate of growth exogenous?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 53(215), pages 433-445.
  7. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  8. Attfield, Clifford L. F. & Silverstone, Brian, 1998. "Okun's Law, Cointegration and Gap Variables," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 625-637, July.
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Cited by:
  1. Lanzafame, Matteo, 2011. "The balance of payments constrained growth rate and the natural rate of growth: new empirical evidence," MPRA Paper 33130, University Library of Munich, Germany.

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