Dynamic regression models with stochastic trends: an application to the unemployment -growth relation

Abstract

The form in which the national product affects the level of unemployment has become one of the most relevant macroeconomic subjects. A simple form of measuring the relation between the increase (decrease) of the national product and the decrease (increase) of the unemployment rate is explained by the so called ``Okun Law´´, according to which it is not expected, except under very special conditions, that each point of increase of the product results in a point of increase of the employment and, consequently, a fall of one point in the unemployment rate. The relation between growth and unemployment is much more complex and can be resumed in the following equation ut - ut-1 = - r (gt - ct), where ut is the unemployment rate, gt the percentage growth of the product and ct represents the percentage growth of the product that it is needed to maintain the unemployment level of the previous period. One of our objectives is to estimate ct .