Validation Of The Modified Okun's Law For Germany

In the upper panel of figure 1, we present the evolution of the cumulative inflation (the sum of annual inflation estimates) in Germany. There are two curves as defined by the CPI and dGDP between 1970 and 2018. Both variables are normalized to their respective values in 1970. Since 1996, the dGDP curve is above the CPI one and this configuration we interpret as economic super-performance. This effect is likely related to the EU financial rules with the ECB in Frankfurt. In the past, Germany has weaker performance and the EU leadership made it a super-economy. In the middle panel, the inflation rates are shown for both variables. In the lower panel, we present the difference between the CPI and dGDP curves in the upper and middle panels. One can see that the difference between the cumulative curves has several quasi-linear segments. The change in the slope between these segments in most likely related to the multiple revision to the dGDP definition. We have already used this observation of the segmented character of the real GDP estimates in order to assess our Okun’s-law-like model of the link between the change in unemployment and the change in real GDP per capita. The years of breaks in the dGDP time series are not easy to estimate from the lower panel of Figure 1 and we allow the LSQR method to find these years when minimizing the RMS residuals.

 

 

Figure 1. Upper panel: The evolution of the cumulative inflation (the sum of annual inflation estimates) as defined by the CPI and dGDP between 1970 and 2018. Both variables are normalized to their respective values in 1970.  Middle panel: The dGDP and CPI inflation estimates. Lower panel: The difference between the CPI and dGDP curves in the upper and middle panels.    

As for other countries, we minimize the model residuals, i.e. determine the break years together with the regression coefficients. For Germany, the best fit model between 1971 and 2018 is as follows:

1 2
View single page >> |

Disclosure: None. 

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.