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

  • Matteo Lanzafame

    ()

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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File URL: ftp://ftp.ukc.ac.uk/pub/ejr/RePEc/ukc/ukcedp/0606.pdf
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Paper provided by School 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
Contact details of provider: Postal: School of Economics, University of Kent, Canterbury, Kent, CT2 7NP
Phone: +44 (0)1227 827497
Web page: http://www.kent.ac.uk/economics/

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  1. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
  2. Barro, R.J., 1989. "Economic Growth In A Cross Section Of Countries," RCER Working Papers 201, University of Rochester - Center for Economic Research (RCER).
  3. Miguel Leon-Ledesma & Anthony P. Thirlwall, 2000. "Is the natural rate of growth exogenous?," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 53(215), pages 433-445.
  4. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
  5. Miguel A. LeÛn-Ledesma & A. P. Thirlwall, 2002. "The endogeneity of the natural rate of growth," Cambridge Journal of Economics, Oxford University Press, vol. 26(4), pages 441-459, July.
  6. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  7. 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.
  8. Blackburn, Keith, 1999. "Can Stabilisation Policy Reduce Long-Run Growth?," Economic Journal, Royal Economic Society, vol. 109(452), pages 67-77, January.
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