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Testing for convergence of the Okun's law coefficient in Europe

Perman, R.J. and Tavera, C. (2007) Testing for convergence of the Okun's law coefficient in Europe. Empirica, 34 (1). pp. 45-61. ISSN 0340-8744

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Without convergence of macroeconomic parameters representative of the nature of adjustment mechanisms, even a common shock to members of a monetary union can lead to different macroeconomic consequences across the union 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) among several alternative groupings of European economies. The empirical strategy adopted is based on the evaluation of the time path of rolling regression estimates of the OLC for European countries. We then use a testing procedure suggested by Evans [Evans P (1996) J Econ Dynam Control 20:1027-1049] to investigate the convergence, or non-convergence, of the OLC in several groups of European countries by examining how the cross-country variance of the OLC evolves over time in these groups. A hypothesis of medium-term convergence of the OLC is rejected for most of the European country groups examined.