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Relationship between inflation, unemployment and labor force change rate in France: cointegration test

  • Ivan O. Kitov
  • Oleg I. Kitov
  • Svetlana A. Dolinskaya

A linear and lagged relationship between inflation, unemployment and labor force change rate, p(t)=A0UE(t-t0)+A1dLF(t-t1)/LF(t-t1)+ A2, where A0, A1, and A2 are empirical country-specific coefficients, was found for developed economies. The relationship obtained for France is characterized by A0=-1, A1=4, A2=0.095, t0=4 years, and t1=4 years. For GDP deflator, it provides a RMS forecasting error (RMFSE) of 1.0% at a four-year horizon for the period between 1971 and 2004. The relationship is tested for cointegration. All three variables involved in the relationship are proved to be integrated of order one. Two methods of cointegration testing are used. First is the Engle-Granger approach based on the unit root test in the residuals of linear regression, which also includes a number of specification tests. Second method is the Johansen cointegration rank test based on a VAR representation, which is also proved to be an adequate one via a set of appropriate tests. Both approaches demonstrate that the variables are cointegrated and the long-run equilibrium relation revealed in previous study holds together with statistical estimates of goodness-of-fit and RMSFE. Relationships between inflation and labor force and between unemployment and labor force are tested separately in appropriate time intervals, where the Banque de France monetary policy introduced in 1995 does not disturb the long-term links. All the individual relationships are cointegrated in corresponding intervals. The VAR and vector error correction (VEC) models are estimated and provide just a marginal improvement in RMSFE at the four-year horizon both for GDP deflator (down to 0.9%) and CPI (~1.1%) on the results obtained in the regression study.

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File URL: http://arxiv.org/pdf/0811.0896
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Paper provided by arXiv.org in its series Papers with number 0811.0896.

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Date of creation: Nov 2008
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Handle: RePEc:arx:papers:0811.0896
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  1. Ivan O. Kitov, 2005. "A model for microeconomic and macroeconomic development," Working Papers 05, ECINEQ, Society for the Study of Economic Inequality.
  2. Ivan Kitov, 2007. "Exact Prediction of Inflation in the USA," Mechonomics mechonomics4, Socionet.
  3. Ivan O. Kitov, 2006. "Inflation, unemployment, labor force change in the USA," Working Papers 28, ECINEQ, Society for the Study of Economic Inequality.
  4. Ivan O. Kitov, 2005. "Modelling the overall personal income distribution in the USA from 1994 to 2002," Working Papers 07, ECINEQ, Society for the Study of Economic Inequality.
  5. Kitov, Ivan, 2007. "Inflation, unemployment, labor force change in European countries," MPRA Paper 14557, University Library of Munich, Germany.
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