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Okun's Law Revisited

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  • Jesus Crespo Cuaresma

Abstract

In the light of modern theoretical studies, the negative relationship between output and unemployment may take a nonlinear form, in the sense that changes in output can cause asymmetric changes in the unemployment rate. A regime-dependent specification of Okun's law, where the inverse relationship between cyclical unemployment and cyclical GDP is allowed to differ across recessions and expansions, is estimated for the US economy. Using both the Hodrick-Prescott filter and a bivariate structural time series model to isolate the cyclical component of the variables of interest, the nonlinear specification is highly significant when tested against the linear alternative independently of the method used for extracting the cycle of unemployment and GDP. The estimation results imply that the contemporaneous effect of growth on unemployment is asymmetric and significantly higher in recessions than in expansions, and shocks to unemployment tend to be more persistent in the expansionary regime. Copyright 2003 Blackwell Publishing Ltd.

Suggested Citation

  • Jesus Crespo Cuaresma, 2003. "Okun's Law Revisited," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(4), pages 439-451, September.
  • Handle: RePEc:bla:obuest:v:65:y:2003:i:4:p:439-451
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    Citations

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    Cited by:

    1. II & Edward S. Knotek, 2007. "How useful is Okun's law?," Economic Review, Federal Reserve Bank of Kansas City, vol. 92(Q IV), pages 73-103.
    2. Jorge Belaire-Franch & Amado Peiró, 2015. "Asymmetry in the relationship between unemployment and the business cycle," Empirical Economics, Springer, vol. 48(2), pages 683-697, March.
    3. Holmes, Mark J. & Silverstone, Brian, 2006. "Okun's law, asymmetries and jobless recoveries in the United States: A Markov-switching approach," Economics Letters, Elsevier, vol. 92(2), pages 293-299, August.
    4. Ho-Chuan (River) Huang & Chih-Chuan Yeh, 2013. "Okun's law in panels of countries and states," Applied Economics, Taylor & Francis Journals, vol. 45(2), pages 191-199, January.
    5. Miguel A. León-Ledesma & Matteo Lanzafame, 2010. "The Endogenous Nature of the ‘Natural’ Rate of Growth," Chapters, in: Mark Setterfield (ed.),Handbook of Alternative Theories of Economic Growth, chapter 10, Edward Elgar Publishing.

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