System Estimates of Cyclical Unemployment and Cyclical Output in the 15 European Union Member-States, 1961-1999

The purpose of this paper was to estimate cyclical unemployment and cyclical output in the 15 European Union member-states using a system of Phillips curve and Okun’s law equations. Treating both the NAIRU and the potential output growth rate as time varying unobserved stochastic processes, a state-space maximum likelihood estimation method - using Kalman filter where the state variables were random walks - was followed in order to estimate the 15 systems of equations. Overall, the estimated with the new approach systems of conditional equations suggested that the extent and direction of changes of cyclical unemployment and cyclical output over the period 1961-1999 is mixed across the 15 EU member states. The paper concludes that the application of “common” policies across the 15 EU member states may be questionable because of the different expected effects of these policies on the various economies.