The Unassuming Economist

From a paper by by Adela Karapici and Arjeta Vokshi:

“This paper estimates the short-run relationship between real output growth and unemployment in Albania over 1992–2023 and asks how sensitive that relationship is to the way crisis episodes are dated. Albania offers a demanding test: a transition economy with high informality, extensive self-employment and sustained emigration, whose sample contains three major shocks in three decades. We estimate first-difference specifications in which the change in the unemployment rate is regressed on output growth, with a lagged dependent variable capturing persistence and separate indicators for the three crisis episodes. Because conventional standard errors are unreliable at this sample size, we report alternative estimators alongside bootstrap inference and a full set of residual and stability diagnostics. Our main practical result concerns crisis dating. Crisis dummies are conventionally dated to the year a crisis began internationally, but for a small open economy whose transmission is indirect, the year in which a shock reaches domestic activity need not be that year. Albania did not contract in 2008 or 2009. We date the financial-crisis indicator from an external chronology of transmission—credit growth, non-performing loans, exports, investment, remittances and the fiscal stance—assembled from contemporaneous institutional sources and fixed before estimation, which places the arrival of the crisis in the Albanian economy in 2009 and 2010. The estimated crisis coefficient is highly sensitive to that choice: a 2008-dated indicator produces the best-fitting specification in this paper on every information criterion together with a large negative coefficient; the conventional 2008–2009 window straddles the turning point and returns an estimate indistinguishable from zero; the 2009–2010 window returns a positive one. These coefficients are individually imprecise, and their intervals overlap, so we do not claim that the data identify any one dating as correct, and we do not treat the sign of an estimate as evidence for or against a window. Our claim is narrower: the substantive conclusion a reader would draw about the crisis is determined by a specification choice that the data cannot settle, so the window has to be fixed ex ante on transmission evidence and its consequences reported. We demonstrate this for Albania and do not assert that published work on other countries is affected; we specify the test that would settle it. The dating choice leaves the estimated Okun coefficient itself almost unchanged. That coefficient is negative in every specification, estimator, subsample and phase definition we report, with a normal-times impact estimate of approximately −0.21, smaller in absolute value than the range reported for advanced economies. Its statistical significance is sensitive to the mode of inference: under the null-imposed bootstrap we regard as most appropriate at this sample size, the coefficient is not significant at conventional levels in the specification that carries that estimate. The evidence for the sign of the relationship is considerably stronger than the evidence for its magnitude, and comparisons of level with advanced-economy estimates should be read against that. The three crisis coefficients are large but imprecisely estimated, and restrictions of equality between them are not rejected, so we report them as descriptive magnitudes and do not rank the episodes. We validate the modeled unemployment series against the national Labour Force Survey over the years in which both exist and re-estimate the model on the national series; the crisis coefficients and the crisis-dating pattern are essentially unchanged. We do not detect a structural break at the 1997 pyramid-scheme collapse once dynamics and crisis indicators are jointly modeled, and we do not detect cyclical asymmetry, though the confidence intervals are wide enough that both are failures to detect rather than evidence of stability or symmetry.”