Rolling Regression Versus Time-Varying Coefficient Modeling: An Empirical Investigation of the Okun's Law in Some Euro Area Countries

Bulletin of Economic Research, Vol. 64, No.1, pp. 91–108, 2012

Posted: 1 May 2011 Last revised: 13 Dec 2011

Date Written: April 30, 2011

Abstract

During the last decade, economists have shown that the inverse relationship between economic growth and unemployment rate varies over time. Rolling regression has been the main tool used to quantify such a relationship. This methodology suffers from several well-known problems which lead to spurious non-linear patterns in the Okun's coefficient behaviour over time. Here, we take a penalized regression spline approach to estimate the Okun's time-varying effects. As a result, spurious non-linearities are suppressed and hence important time-varying coefficient features revealed. Our empirical results show that the inverse relationship in some Euro area countries is spatially heterogeneous and time-varying. The findings are complemented by the calculation of the rate of output growth needed for a stable unemployment rate, as proposed by Knotek.

Keywords: Okun's coefficient, penalized regression spline, rolling regression, time-varying coefficient model

JEL Classification: C14, C50, E24

Suggested Citation

Zanin, Luca and Marra, Giampiero, Rolling Regression Versus Time-Varying Coefficient Modeling: An Empirical Investigation of the Okun's Law in Some Euro Area Countries (April 30, 2011). Bulletin of Economic Research, Vol. 64, No.1, pp. 91–108, 2012, Available at SSRN: https://ssrn.com/abstract=1826903

Giampiero Marra

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

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