The Modified Okun's Law For France. Model Validation With Rsq=0.98

In the upper panel of Figure 1, we present the evolution of the cumulative inflation (the sum of annual inflation estimates) in France. There are two curves as defined by the CPI and dGDP between 1955 and 2018. Both variables are normalized to their respective values in 1955. Since 1985, the dGDP curve is above the CPI one and this configuration we interpret as economic underperformance. Also, we reported in this post that France has a very low annual increment of the real GDP per capita. This effect is likely related to the EU financial rules. In the past, France and other European countries with underperforming economics forced price inflation in order to make exports more attractive due to lowering the exchange rate. 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 (e.g., imputed rent). 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 1955 and 2018. Both variables are normalized to their respective values in 1961.  Middle panel: The dGDP and CPI inflation estimates. Lower panel: The difference between the CPI and dGDP curves in the upper and middle panels.    

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