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Non-linearities and fractional integration in the US unemployment rate

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  • Caporale, Guglielmo Maria
  • Gil-Alana, Luis A.

Abstract

This paper proposes a model of the US unemployment rate which accounts for both its asymmetry and its long memory. Our approach, based on the tests of Robinson (1994), 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 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, hence giving support to more activist stabilisation policies. However, any suitable model should also include business cycle asymmetries, with implications for both forecasting and policymaking. --

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Bibliographic Info

Paper provided by Hamburg Institute of International Economics (HWWA) in its series HWWA Discussion Papers with number 259.

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Date of creation: 2004
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Handle: RePEc:zbw:hwwadp:26232

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Keywords: Unemployment; Asymmetries; Nonlinearities; Fractional Integration; Persistence; Long Memory;

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References

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  1. Mehmet Caner & Bruce E. Hansen, 2001. "Threshold Autoregression with a Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 69(6), pages 1555-1596, November.
  2. Skalin, Joakim & Ter svirta, Timo, 2002. "Modeling Asymmetries And Moving Equilibria In Unemployment Rates," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 6(02), pages 202-241, April.
  3. 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.
  4. 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.
  5. Philip Rothman, 1998. "Forecasting Asymmetric Unemployment Rates," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 164-168, February.
  6. Gil-Alana, Luis A., 2002. "Seasonal long memory in the aggregate output," Economics Letters, Elsevier, Elsevier, vol. 74(3), pages 333-337, February.
  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. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," Working Paper Series in Economics and Finance 56, Stockholm School of Economics.
  9. Guglielmo Maria Caporale & Luis Gil-Alana, 2002. "Unemployment and input prices: a fractional cointegration approach," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(6), pages 347-351.
  10. Hamermesh, Daniel S & Pfann, Gerard Antonie, 1996. "Adjustment Costs in Factor Demand," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1371, C.E.P.R. Discussion Papers.
  11. 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.
  12. 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.
  13. Gil-Alana, Luis A., 1999. "Testing fractional integration with monthly data," Economic Modelling, Elsevier, Elsevier, vol. 16(4), pages 613-629, December.
  14. 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.
  15. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 31(2), pages 149-163, April.
  16. 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.
  17. 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.
  18. Gil-Alana, Luis A., 2000. "Mean reversion in the real exchange rates," Economics Letters, Elsevier, Elsevier, vol. 69(3), pages 285-288, December.
  19. 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.
  20. 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.
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