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The Dynamics of Economic Growth and Unemployment in Major European Countries: Analysis of Okun´s Law

  • Zagler, Martin

    ()

This paper analyzes a vector error correction model of economic growth and unemployment in four major European economies, France, Germany, Italy, and the UK. We find that unemployment and economic growth are cointegrated, and driven be the same autoregressive unit root present in most endogenous growth models. In the long run, economic growth and unemployment are positively correlated, as suggested by recent economic theories on endogenous growth and unemployment. In the short-run, an increase in the equilibrium unemployment rate is related to a decline in economic growth rates. The short-run dynamics of economic growth and unemployment therefore remain consistent with Okun's law. Okun's coefficient is in line with previous estimates for all countries except for the UK, whose labor market appears much more flexible in accommodating adverse transitory shocks than continental labor markets.

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Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

Volume (Year): 3 (2003)
Issue (Month): 3 ()
Pages:

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Handle: RePEc:eaa:aeinde:v:3:y:2003:i:3_18
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  1. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
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  8. Juan J. Dolado & Juan F. Jimeno, . "The causes of Spanish unemployment: A structural VAR apporach," Working Papers 96-19, FEDEA.
  9. Mankiw, N. Gregory & Campbell, John, 1989. "International Evidence on the Persistence of Economic Fluctuations," Scholarly Articles 3224417, Harvard University Department of Economics.
  10. Banerjee, Anindya & Hendry, David F, 1992. "Testing Integration and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 225-55, August.
  11. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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