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

Borrador número 1034
Keep in mind

The series Working Papers on Economics is published by the Office for Economic Studies at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors.

AUTHOR OR EDITOR
J. Sebastián Amador-Torres
Publication Date:
Tuesday, 16 January 2018

 

The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

 

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.