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Asymmetric Adjustment of Unemployment and Output in New Zealand: Rediscovering Okun's Law

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Abstract

Okun's law - the relationship between unemployment and output - is one of the best known empirical regularities in macroeconomics. It is an important relationship because the way in which unemployment reacts to changes in output has implications for labour market and monetary policies and for forecasting. Most specifications of Okun's law assume a symmetric relationship: expansions and contractions in output have the same absolute effect on unemployment. In this paper, we test this assumption against the alternative view that the relationship is asymmetric. We use New Zealand data from 1978 to 1999 and contemporary econometric techniques including asymmetric modelling. Our main finding is that changes in unemployment and output in New Zealand are related in both the long run and the short run but only if an asymmetric approach is taken.

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File URL: ftp://mngt.waikato.ac.nz/RePEc/wai/econwp/0002.pdf
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Bibliographic Info

Paper provided by University of Waikato, Department of Economics in its series Working Papers in Economics with number 00/02.

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Length: 23 pages
Date of creation: 01 May 2000
Date of revision:
Handle: RePEc:wai:econwp:00/02

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Keywords: Okun's law; asymmetric modelling; unemployment and output; New Zealand;

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References

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  1. Attfield, Clifford L. F. & Silverstone, Brian, 1998. "Okun's Law, Cointegration and Gap Variables," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 625-637, July.
  2. Perron, Pierre, 1988. "Trends and random walks in macroeconomic time series : Further evidence from a new approach," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 297-332.
  3. Banerjee, Anindya & Lumsdaine, Robin L & Stock, James H, 1992. "Recursive and Sequential Tests of the Unit-Root and Trend-Break Hypotheses: Theory and International Evidence," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 271-87, July.
  4. Sichel, D.E., 1988. "Business Cycle Asymmetry: A Deeper Look," Papers 85, Princeton, Department of Economics - Financial Research Center.
  5. 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.
  6. Enders, Walter & Granger, C. W. J., 1998. "Unit Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Staff General Research Papers 1388, Iowa State University, Department of Economics.
  7. Kaufman, Roger T., 1988. "An international comparison of Okun's laws," Journal of Comparative Economics, Elsevier, vol. 12(2), pages 182-203, June.
  8. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  9. James G. MacKinnon, 2010. "Critical Values for Cointegration Tests," Working Papers 1227, Queen's University, Department of Economics.
  10. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-76, April.
  11. Weber, Christian E, 1995. "Cyclical Output, Cyclical Unemployment, and Okun's Coefficient: A New Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(4), pages 433-45, Oct.-Dec..
  12. Moosa, Imad A., 1997. "A Cross-Country Comparison of Okun's Coefficient," Journal of Comparative Economics, Elsevier, vol. 24(3), pages 335-356, June.
  13. Speight, A E H & McMillan, D G, 1998. "Testing for Asymmetries in UK Macroeconomic Time Series," Scottish Journal of Political Economy, Scottish Economic Society, vol. 45(2), pages 158-70, May.
  14. Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 216-27, June.
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Cited by:
  1. Javier J. Pérez & Jesús Rodríguez López & Teresa Leal, 2002. "Pautas cíclicas de la economía andaluza en el período 1984-2001: un análisis comparado," Economic Working Papers at Centro de Estudios Andaluces E2002/18, Centro de Estudios Andaluces.
  2. Matti Virén, 2000. "Cross-country Evidence on a Nonlinear Okun Curve," Discussion Papers 239, Government Institute for Economic Research Finland (VATT).
  3. David G. Mayes & Matti Virén, 2004. "Asymmetries in the Euro area economy," Macroeconomics 0404024, EconWPA.
  4. Javier J. Pérez & Jesús Rodríguez López & Carlos Usabiaga, 2002. "Análisis Dinámico de la Relación entre Ciclo Económico y Ciclo del Desempleo en Andalucía en Comparación con el Resto de España," Economic Working Papers at Centro de Estudios Andaluces E2002/07, Centro de Estudios Andaluces.

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