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A strong hysteretic model of Okun's Law: theory and a preliminary investigation

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  • Dany Lang
  • Christian de Peretti

Abstract

This paper presents a 'strong hysteretic' version of Okun's Law, that is, a version of the law in which 'history matters.' In this version of the link between fluctuations in unemployment and growth, the most important past growth shock exerts an influence on the current unemployment rate. A theoretical framework is proposed in order to lay the foundations of this version of Okun's Law. In this framework, the hysteresis property arises because a large number of heterogeneous firms discontinuously adjust their activity levels in response to fluctuations in the rate of growth. The foundations having been laid, a method for empirically testing our hysteretic Okun's Law is presented. An algorithm permits construction of a hysteresis operator, which synthesizes, for every moment, the growth shocks that have remained in the memory bank of the unemployment rate. Empirical tests are conducted to assess the empirical relevance of this version of Okun's Law, as compared to the more familiar linear relationship. Empirical results consistent with hysteresis are found for several of the countries in our sample.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/02692170902954775
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

Volume (Year): 23 (2009)
Issue (Month): 4 ()
Pages: 445-462

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Handle: RePEc:taf:irapec:v:23:y:2009:i:4:p:445-462

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Related research

Keywords: Okun's law; unemployment fluctuations; hysteresis;

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Cited by:
  1. Kargı, Bilal, 2014. "The Data of Labor Market in Turkey and Time Series Analysis on Economic Growth (2000:01-2013:03)," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 98-102.
  2. Roger Perman & Stephan Gaetan & Christophe Tavera, 2013. "Okun's law - a meta analysis," Working Papers 1311, University of Strathclyde Business School, Department of Economics.
  3. Charles, Sébastien & Lang, Dany & Asensio, Angel, 2010. "Post-Keynesian modelling: where are we, and where are we going to?," MPRA Paper 30726, University Library of Munich, Germany.
  4. KARGI, Bilal, 2013. "Okun’s Law and Long Term Co-Integration Analysis for OECD Countries (1987-2012)," MPRA Paper 55700, University Library of Munich, Germany.
  5. Albers, Scott, 2013. "Okun’s Law as a Pi-to-1 ratio: A harmonic / trigonometric theory as to why Okun’s Law works," MPRA Paper 46633, University Library of Munich, Germany.

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