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Non-Linearities And Fractional Integration In The Us Unemployment Rate

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  • Guglielmo Maria Caporale

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  • Luis A. Gil-Alana

Abstract

This paper proposes a model of the US unemployment rate which accounts for both its asymmetry and its long memory. Our approach introduces fractional integration and nonlinearities simultaneously into the same framework (unlike earlier studies employing a sequential procedure), using a Lagrange Multiplier procedure with a standard null limit distribution. The empirical results suggest that the US unemployment rate can be specified in terms of a fractionally integrated process, which interacts with some non-linear functions of the labour demand variables (real oil prices and real interest rates). We also find evidence of a long-memory component. Our results are consistent with a hysteresis model with path dependency rather than a NAIRU model with an underlying unemployment equilibrium rate, thereby giving support to more activist stabilisation policies. However, any suitable model should also include business cycle asymmetries, with implications for both forecasting and policy-making.

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Bibliographic Info

Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Economics and Finance Discussion Papers with number 04-17.

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Length: 25 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:bru:bruedp:04-17

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Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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  1. Philip Rothman, . "Forecasting Asymmetric Unemployment Rates," Working Papers 9618, East Carolina University, Department of Economics.
  2. Eitrheim, Oyvind & Terasvirta, Timo, 1996. "Testing the adequacy of smooth transition autoregressive models," Journal of Econometrics, Elsevier, Elsevier, vol. 74(1), pages 59-75, September.
  3. Carruth,a. & Hooker, N. & Oswald,A., 1997. "Unemployment Equilibria and Input Prices: Theory and Evidence from the United States," Papers, Centre for Economic Performance & Institute of Economics 22, Centre for Economic Performance & Institute of Economics.
  4. Bruce E. Hansen & Mehmet Caner, 1997. "Threshold Autoregressions with a Unit Root," Boston College Working Papers in Economics 381, Boston College Department of Economics.
  5. Hamermesh, Daniel S & Pfann, Gerard Antonie, 1996. "Adjustment Costs in Factor Demand," CEPR Discussion Papers 1371, C.E.P.R. Discussion Papers.
  6. Franses, Ph.H.B.F. & Paap, R., 1998. "Modelling asymmetric persistence over the business cycle," Econometric Institute Research Papers EI 9852, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  7. Marco Bianchi & Gylfi Zoega, 1998. "Unemployment persistence: does the size of the shock matter?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 13(3), pages 283-304.
  8. Cross, Rod, 1994. "The Macroeconomic Consequences of Discontinuous Adjustment: Selective Memory of Non-dominated Extrema," Scottish Journal of Political Economy, Scottish Economic Society, vol. 41(2), pages 212-21, May.
  9. Gil-Alana, Luis A., 2000. "Mean reversion in the real exchange rates," Economics Letters, Elsevier, vol. 69(3), pages 285-288, December.
  10. Luis Gil-Alana, 2003. "Seasonal Misspecification in the Context of Fractionally Integrated Univariate Time Series," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 22(1), pages 65-74, August.
  11. Guglielmo Maria Caporale & Luis Gil-Alana, 2002. "Unemployment and input prices: a fractional cointegration approach," Applied Economics Letters, Taylor & Francis Journals, vol. 9(6), pages 347-351.
  12. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  13. Gil-Alana, Luis A., 1999. "Testing fractional integration with monthly data," Economic Modelling, Elsevier, vol. 16(4), pages 613-629, December.
  14. Gil-Alana, Luis A., 2002. "Seasonal long memory in the aggregate output," Economics Letters, Elsevier, vol. 74(3), pages 333-337, February.
  15. Ramsey, J.B. & Rothman, P., 1993. "Time Irreversibility and Business Cycle Asymmetry," Working Papers, C.V. Starr Center for Applied Economics, New York University 93-39, C.V. Starr Center for Applied Economics, New York University.
  16. Skalin, Joakim & Teräsvirta, Timo, 1998. "Modelling asymmetries and moving equilibria in unemployment rates," Working Paper Series in Economics and Finance 262, Stockholm School of Economics, revised 05 Oct 1998.
  17. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(2), pages 149-163, April.
  18. L. A. Gil-Alaña & Peter M. Robinson, 2001. "Testing of seasonal fractional integration in UK and Japanese consumption and income," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 298, London School of Economics and Political Science, LSE Library.
  19. Gil-Alana, L. A. & Robinson, P. M., 1997. "Testing of unit root and other nonstationary hypotheses in macroeconomic time series," Journal of Econometrics, Elsevier, Elsevier, vol. 80(2), pages 241-268, October.
  20. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 92(2), pages 307-28, April.
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