Okun's Law Revisited
AbstractIn the light of modern theoretical studies, the negative relationship between output and unemployment may take a nonlinear form, in the sense that changes in output can cause asymmetric changes in the unemployment rate. A regime-dependent specification of Okun's law, where the inverse relationship between cyclical unemployment and cyclical GDP is allowed to differ across recessions and expansions, is estimated for the US economy. Using both the Hodrick-Prescott filter and a bivariate structural time series model to isolate the cyclical component of the variables of interest, the nonlinear specification is highly significant when tested against the linear alternative independently of the method used for extracting the cycle of unemployment and GDP. The estimation results imply that the contemporaneous effect of growth on unemployment is asymmetric and significantly higher in recessions than in expansions, and shocks to unemployment tend to be more persistent in the expansionary regime. Copyright 2003 Blackwell Publishing Ltd.
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Bibliographic InfoArticle provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.
Volume (Year): 65 (2003)
Issue (Month): 4 (09)
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- Holmes, Mark J. & Silverstone, Brian, 2006.
"Okun's law, asymmetries and jobless recoveries in the United States: A Markov-switching approach,"
Elsevier, vol. 92(2), pages 293-299, August.
- Mark J. Holmes & Brian Silverstone, 2005. "Okun's Law, Asymmetries and Jobless Recoveries in the United States: A Markov-Switching Approach," Working Papers in Economics 05/06, University of Waikato, Department of Economics.
- Edward S. Knotek & II, 2007. "How useful is Okun's law?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 73-103.
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