Testing for Convergence of the Okun’s Law Coefficient in Europe

Perman, Roger and Tavera, Christophe (2004) Testing for Convergence of the Okun’s Law Coefficient in Europe. Discussion paper. University of Strathclyde, Glasgow.

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Abstract

A large number of papers have considered the question of whether the European Union (EU) is an optimal currency area by analysing either the dispersion (and/or the correlation) of observable variables such as output, output per head, and GDP growth rates or the dispersion (and/or the correlation) of unobservable variables such as demand and supply shocks. This approach typically leads to a division of countries between a core and a periphery. We move to a quantitative approach that focuses on asymmetry stemming from differences in the way countries react to symmetric euro area shocks. Without convergence of macroeconomic “parameters” representative of the nature of adjustment mechanisms, even a common shock to the union can lead to different macro-economic consequences across the EU members and, eventually, to the need for more or less co-ordinated specific policies. In this paper, we test for the presence of convergence of the Okun’s Law coefficient (OLC hereafter). This constitutes one of the main macro-economic parameters underlying the sensitivity of unemployment variations to fluctuations in economic activity.

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