Okun´s law in Colombia: a non-linear cointegration

Flórez, Luz Adriana; Pulido-Mahecha, Karen L.; Ramos-Veloza, Mario Andrés

Okun´s law in Colombia: a non-linear cointegration

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Borradores de Economía; No. 1039

Date published

2018-02-16

Date

2018-02-16

Authors

Flórez, Luz Adriana
Pulido-Mahecha, Karen L.
Ramos-Veloza, Mario Andrés

Document language

eng

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Las opiniones contenidas en el presente documento son responsabilidad exclusiva de los autores y no comprometen al Banco de la República ni a su Junta Directiva.

The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

Abstract

This paper identifies Okun´s law in Colombia between 1984 and 2016 using a Vector Error Correction Model (VECM) as there is evidence of a long-term relationship between the unemployment rate and the GDP. Results suggest that after a one percent increase in GDP, the unemployment rate is reduced by 0.45 percentage points in the long run (after sixteen quarters). In addition we inspect for nonlinearities using a threshold cointegration model (TVECM). Results suggest the existence of two regimes a low and a high one. The high regime starts at the late nineties and is associated with a more flexible labor market. Under this regime, a 1% increase in GDP, reduces the UR 0.6 percentage points after eighteen quarters. By contrast, under the low regime the response is 0.2 percentage points after eight quarters