Okun's Law and Fiscal Policy: Analysis for Latin America using a TVP-VAR-SV model
No. 102 (2026-04-13)Author(s)
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Juan Camilo Villar OtáloraUniversidad Externado de ColombiaORCID iD: https://orcid.org/0000-0003-0940-1639
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Carlos Fabián Ruiz ParedesUniversidad Externado de ColombiaORCID iD: https://orcid.org/0000-0003-1507-1779
Abstract
This paper examines the validity and temporal stability of Okun's Law for 10 Latin American countries over the period 1980-2023, considering the effects of fiscal policy. To this end, a TVP-VAR-SV model is estimated to capture dynamic relationships between GDP growth, variations in the unemployment rate, and government final consumption expenditure as a proportion of GDP, while accounting for structural changes and uncertainty scenarios. The results of the first of two econometric exercises indicate that this relationship has not been stable or homogeneous across the countries in the sample over time. The second exercise finds that the inclusion of a third variable produces different effects on the traditional relationship proposed by Okun and on variations in unemployment.
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