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Cross-country Evidence on a Nonlinear Okun Curve

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  • Matti Virén
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    Abstract

    This paper presents cross-country evidence on a nonlinear Okun curve. The analysis is based on a simple error-correction model of unemployment. The model is estimated using a threshold model estimator. Evidence from 20 OECD countries for 1960-1997 gives support for the existence of nonlinearities in terms of the output growth effects. Output growth has a strong effect on unemployment when unemployment is low and output is high, and vice versa. Thus, in bad times, the effect of output growth on unemployment can be close to zero. In addition to this nonlinear output effect, also the population growth effect appears to be of similar type. The above mentioned basic results turn out to be robust in terms of estimation method (single equation vs pooled data estimation) and specification of the threshold variable.

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    Bibliographic Info

    Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 239.

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    Date of creation: 31 Dec 2000
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    Handle: RePEc:fer:dpaper:239

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    Related research

    Keywords: Unemployment; population shocks; threshold models;

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    1. Richard Harris & Brian Silverstone, 2000. "Asymmetric Adjustment of Unemployment and Output in New Zealand: Rediscovering Okun's Law," Working Papers in Economics 00/02, University of Waikato, Department of Economics.
    2. Prachowny, Martin F J, 1993. "Okun's Law: Theoretical Foundations and Revised Estimates," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 331-36, May.
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