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Hysteresis vs. natural rate of US unemployment

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  • Cheng, Ka Ming
  • Durmaz, Nazif
  • Kim, Hyeongwoo
  • Stern, Michael L.

Abstract

This paper investigates the stochastic nature of the unemployment rate allowing for cross-section dependence from a panel of US state-level data. We first employ the PANIC method to identify the common and idiosyncratic components. Powerful recursive mean adjustment (RMA) methods are used to test for unit roots. We find significant evidence of a nonstationary common component when the data from the most recent recession are included. Even when stationarity is empirically supported, the bias-corrected half-life of the common component appears very long, casting doubt on the usefulness of the natural rate hypothesis.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 2 ()
Pages: 428-434

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:2:p:428-434

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Unemployment rate; Natural rate hypothesis; Hysteresis; PANIC; RMA; Cross-section dependence;

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  1. Jushan Bai & Serena Ng, 2001. "A PANIC Attack on Unit Roots and Cointegration," Boston College Working Papers in Economics, Boston College Department of Economics 519, Boston College Department of Economics.
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Cited by:
  1. Aloy Marcel & Tong Charles Lai & Peguin-Feissolle Anne & Dufrénot Gilles, 2013. "A smooth transition long-memory model," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(3), pages 281-296, May.
  2. Donald Freeman, 2011. "On (not) Closing the Gaps: The Evolution of National and Regional Unemployment Rates by Race and Ethnicity," Working Papers, Sam Houston State University, Department of Economics and International Business 1101, Sam Houston State University, Department of Economics and International Business.
  3. Mark J. Holmes & Jesús Otero & Theodore Panagiotidis, 2013. "Modelling the Behaviour of Unemployment Rates in the US over Time and across Space," Working Paper Series, The Rimini Centre for Economic Analysis 39_13, The Rimini Centre for Economic Analysis.
  4. Giorgio Canarella & Stephen M. Miller & Stephen K. Pollard, 2013. "Unemployment Rate Hysteresis and the Great Recession: Exploring the Metropolitan Evidence," Working papers, University of Connecticut, Department of Economics 2013-19, University of Connecticut, Department of Economics.
  5. Partridge, Mark D. & Rickman, Dan S. & Olfert, M. Rose & Tan, Ying, 2012. "When spatial equilibrium fails: is place-based policy second best?," MPRA Paper 40270, University Library of Munich, Germany.
  6. Cevik, Emrah Ismail & Dibooglu, Sel, 2013. "Persistence and non-linearity in US unemployment: A regime-switching approach," Economic Systems, Elsevier, vol. 37(1), pages 61-68.

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