Nonlinear co-integration between unemployment and economic growth in South Africa

Abstract

In this paper, a momentum threshold autoregressive (mtar) model is used to evaluate nonlinear equilibrium reversion between unemployment and economic growth for South African data between the periods 2000-2013. To attain this objective we estimate the first-difference and the gap model variations of Okun's specification. For the latter model variation, we employ three de-trending methods to obtain the relevant 'gap' data; namely, the Hodrick-Prescott (hp) filter, the Baxter-King (bk) filter and the Butterworth (bw) digital filter. A common finding from our empirical analysis is that Okun's law holds concretely for South African data regardless of the model specification or the de-trending technique that is used. Moreover, our analysis proves that unemployment granger causes economic growth in the long-run, a result which may account for the jobless-growth phenomenon experienced by South Africa over the last decade or so.