Cointegration and Asymmetric Adjustment between Output and Unemployment: an Application to the U.S. Economy
AbstractThis paper focuses on the properties of the adjustment between the real output and the unemployment rate for the U.S. economy in the period from 1975 to 2006. It starts by checking the order of integration of the two series and then tests for the presence of asymmetry in the Okun’s law relationship through a cyclical equation, a first differences equation and an ADL(p,q). Using the threshold cointegration approach this study also accounts for the possible existence of a long-run equilibrium relationship and it is ability to test for the asymmetric adjustment hypothesis. It is found that Okun’s coefficient ranges between -0.41 and -0.59, being the latter estimated by the cointegrating equation. Furthermore, the unemployment rate behaves differently along the business cycle and increases faster in recessions than it recovers in expansions. A long-run equilibrium relationship is established where adjustment is made asymmetrically. Positive deviations away from equilibrium are corrected slightly faster than negative ones. Our explanation concerns the higher speed of flows within the labor market during a recession than during an expansion which may also be related to the existence of nominal rigidities in the US economy that causes imperfectly flexible prices.
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Bibliographic InfoPaper provided by Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro in its series Working Papers de Economia (Economics Working Papers) with number 52.
Length: 23 pages
Date of creation: Dec 2009
Date of revision:
Okun’s Law; Threshold Cointegration; Asymmetric Adjustment; Monte Carlo Simulations; U.S. Economy;
Find related papers by JEL classification:
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
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