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New Keynesian NAIRU and the Okun Law: An application for Colombia

Author

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  • J. Sebastián Amador-Torres

    (Banco de la República de Colombia)

Abstract

This paper proposes new monthly estimates for the non-accelerating inflation rate of unemployment (NAIRU) and the output gap for Colombia. These rely on a New Keynesian small open economy model following González et al (2013), augmented by an Okun’s Law equation. The resulting output gap closely follows the business cycle, as identified by other estimates currently employed by the central bank. The unemployment gap is negatively correlated to the output gap, in a magnitude consistent with simple Okun Law’s estimations. Unlike previous works, this paper presents shocks decompositions, which allow for some economic interpretation of the unemployment dynamics in terms of macroeconomic shocks. This framework might be well suited to evaluate the effects of monetary policy on the labor market, as suggested by an evaluation of forecasting accuracy.

Suggested Citation

  • J. Sebastián Amador-Torres, 2018. "New Keynesian NAIRU and the Okun Law: An application for Colombia," Borradores de Economia 1034, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:1034
    DOI: 10.32468/be.1034
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    File URL: https://doi.org/10.32468/be.1034
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    References listed on IDEAS

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    1. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
    2. Luis E. Arango & Luz A. Flórez, 2020. "Determinants of structural unemployment in Colombia: a search approach," Empirical Economics, Springer, vol. 58(5), pages 2431-2464, May.
    3. Luis Eduardo Arango & Carlos Esteban Posada, 2006. "The Time-Varying Long-Run Unemployment Rate: The Colombian Case," Borradores de Economia 389, Banco de la Republica de Colombia.
    4. Leduc, Sylvain & Liu, Zheng, 2016. "Uncertainty shocks are aggregate demand shocks," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 20-35.
    5. Adolfo L.Cobo, 2005. "Output Gap in Colombia: An Eclectic Approach," Borradores de Economia 327, Banco de la Republica de Colombia.
    6. Jared Laxton & Igor Ermolaev & Charles Freedman & Mr. Ondrej Kamenik & Michel Juillard & Mr. Douglas Laxton & Ioan Carabenciov & Dmitry Korshunov, 2008. "A Small Quarterly Multi-Country Projection Model," IMF Working Papers 2008/279, International Monetary Fund.
    7. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
    8. Adolfo Cobo, 2005. "Output Gap In Colombia: An Eclectic Approach," Borradores de Economia 3310, Banco de la Republica.
    9. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November.
    10. Luis Eduardo Arango & Carlos Esteban Posada, 2006. "The Time-Varying Long-Run Unemployment Rate: The Case Colombian," Borradores de Economia 3629, Banco de la Republica.
    11. Amador-Torres, J. Sebastián, 2017. "Finance-neutral potential output: An evaluation in an emerging market monetary policy context," Economic Systems, Elsevier, vol. 41(3), pages 389-407.
    12. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, April.
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    Cited by:

    1. Norberto Rodríguez-Niño & Alejandra Ramírez-Ramírez, 2018. "Metodologías semi-estructurales para estimar la Inflación básica mensual en Colombia," Borradores de Economia 1040, Banco de la Republica de Colombia.

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    More about this item

    Keywords

    NAIRU; unemployment; output gap; New Keynesian model; monetary policy; emerging economy; monthly data.;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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