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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.

Suggested Citation

  • Matteo Lanzafame, 2006. "The Endogeneity of the Natural Rate of Growth in the Regions of Italy," Studies in Economics 0606, School of Economics, University of Kent.
  • Handle: RePEc:ukc:ukcedp:0606

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    References listed on IDEAS

    1. 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.
    2. Miguel Leon-Ledesma & A.P. Thirlwall, 2007. "Is the Natural Rate of Growth Exogenous?," Chapters,in: Economic Growth, chapter 4 Edward Elgar Publishing.
    3. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    4. 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.
    5. 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.
    6. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
    7. Blackburn, Keith, 1999. "Can Stabilisation Policy Reduce Long-Run Growth?," Economic Journal, Royal Economic Society, vol. 109(452), pages 67-77, January.
    8. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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    Cited by:

    1. repec:cup:macdyn:v:21:y:2017:i:04:p:982-1022_00 is not listed on IDEAS
    2. Mendieta-Muñoz, Ivan, 2015. "Is potential output growth falling?," MPRA Paper 68278, University Library of Munich, Germany.
    3. Mendieta-Muñoz, Ivan, 2017. "On The Interaction Between Economic Growth And Business Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 21(04), pages 982-1022, June.
    4. Matteo Lanzafame, 2014. "The balance of payments-constrained growth rate and the natural rate of growth: new empirical evidence," Cambridge Journal of Economics, Oxford University Press, vol. 38(4), pages 817-838.
    5. Matteo Lanzafame, 2016. "Potential Growth in Asia and Its Determinants: An Empirical Investigation," Asian Development Review, MIT Press, vol. 33(2), pages 1-27, September.
    6. Miguel A. León-Ledesma & Matteo Lanzafame, 2010. "The Endogenous Nature of the ‘Natural’ Rate of Growth," Chapters,in: Handbook of Alternative Theories of Economic Growth, chapter 10 Edward Elgar Publishing.
    7. Valadkhani, Abbas & Smyth, Russell, 2015. "Switching and asymmetric behaviour of the Okun coefficient in the US: Evidence for the 1948–2015 period," Economic Modelling, Elsevier, vol. 50(C), pages 281-290.
    8. Senay, Acikgöz & Mert, Merter, 2015. "The endogeneity of the natural rate of growth: An alternative approach," Economics Discussion Papers 2015-2, Kiel Institute for the World Economy (IfW).

    More about this item


    Endogenous growth; Okun's Law; Italian regions;

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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