Okun's law in Ecuador. A Cointegration Analysis, 2007-2019
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The study analyzes Okun's law for Ecuador during 2007.I-2019.IV with two cointegration methodologies, the Johansen & Juselius (1990) method and the Autoregressive Distributed Lag (ARDL) approach proposed by Pesaran & Shin (1995) and Pesaran, Shin & Smith (2001). The empirical results indicate that in the long term unemployment has a statistically significant negative effect on production. The cointegration analysis indicates that an additional percentage point in the unemployment rate decreases production by 2,06% in the case of the Johansen & Juselius (1990) approach and by 2,09% with the ARDL approach. The results indicate a bidirectional relationship between production and unemployment, and point out that when faced with fluctuations in the system, the effect on unemployment registers its maximum level in the fifth quarter, while the product reaches its maximum point in the third quarter. This suggests that policy makers should consider boosting production as a key strategy to combat unemployment and the high cost of unemployment in terms of output, and that the effects of policies that seek to promote the economy will be transmitted to the long of the time.
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