Abstract
This paper analyses responses to supply and demand shocks in PIIGS countries. We compare the results obtained for PIIGS with those of Germany and the USA, and also with those of France, which despite its government?s efforts demonstrate relatively poor recent economic performance. The main objective of this paper is to establish whether it is still reasonable to consider PIIGS as a group apart. Our methodological strategy is based on the Okun Law (OL) which is incorporated in a Structural Vector Autoregression (SVAR) model with Blanchard-Quah (BQ) restrictions. We address two drawbacks that usually present in the OL: the interdependency problem and the non-stationarity problem. By using a non-parametric representation of OL, we identify the heterogeneity between countries. We build stable VAR models for each of the economies and use the BQ SVAR impulses to analyse the importance of contemporary and long-run effects of supply and demand shocks. The main conclusion of this paper is that it does not make any sense today to identify PIIGS as a separate group. Additionally, a country that stands out from our analysis is France. The question can thus be posed that if ?PIIGS? signifies ?countries with poor economic performances? then should not France also belong to this group?
Highlights
As already mentioned in the introduction, in order to analyse the supply and demand shocks adjustment dynamics in PIIGS, benchmark economies, and France, we have opted for a pseudo Blanchard-Quah (PBQ) Structural Vector Autoregression (SVAR) model that we build for each economy
After a brief data description and non-parametric representation of the Okun Law (OL) for PIIGS, benchmark economies, and France, we test the presence of a unit root (UR) in our series, and verify the stability of our VAR models
The main purpose of this paper has been to establish whether PIIGS, all of which continue to register sluggish growth rates and high levels of unemployment, are so much different from other developed economies
Summary
1.1 The Okun Law: A Stable Negative Relation between Output Growth and Unemployment. A 3 percentage point increase in GDP from its long-run level is associated with a 1 percentage point decrease in unemployment. These findings were very appealing to economists and politicians. Freeman (2000) obtained the same value for the USA for the period 1958-98 with quarterly data and eight regions, and for 1977-97 with annual data and all states This empirical regularity reported by Okun (1962a) became an empirical law called Okun’s Law, which basically states the existence of a stable negative relationship between the unemployment rate and the output growth rate, i.e. mutatis mutandis a link between a reduction in unemployment and an increase in output
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