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Modelling Okun’s law: Does non-Gaussianity matter?

Author

Listed:
  • Tamás Kiss

    (Örebro University)

  • Hoang Nguyen

    (Örebro University)

  • Pär Österholm

    (Örebro University
    National Institute of Economic Research)

Abstract

In this paper, we analyse Okun’s law—a relation between the change in the unemployment rate and GDP growth—using data from Australia, the euro area, the UK and the USA. More specifically, we assess the relevance of non-Gaussianity when modelling the relation. This is done in a Bayesian VAR framework with stochastic volatility where we allow the different models’ error distributions to have heavier-than-Gaussian tails and skewness. Our results indicate that accounting for heavy tails yields improvements over a Gaussian specification in some cases, whereas skewness appears less fruitful. In terms of dynamic effects, a shock to GDP growth has robustly negative effects on the change in the unemployment rate in all four economies.

Suggested Citation

  • Tamás Kiss & Hoang Nguyen & Pär Österholm, 2023. "Modelling Okun’s law: Does non-Gaussianity matter?," Empirical Economics, Springer, vol. 64(5), pages 2183-2213, May.
    • Handle: RePEc:spr:empeco:v:64:y:2023:i:5:d:10.1007_s00181-022-02309-2
    DOI: 10.1007/s00181-022-02309-2
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    More about this item

    Keywords

    Bayesian VAR; Heavy tails; GDP growth; Unemployment;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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