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Threshold effects in Okun's Law: a panel data analysis

  • Julien Fouquau

    ()

    (ESC Rouen and LEO)

Our approach involves the use of switching regime models, to take account of the structural asymmetry and time instability of Okun's coefficient. More precisely, we apply the non-dynamic panel transition regression model introduced by Hansen (1999) to a panel of 20 OECD countries over the last three decades. With all specifications applied, the tests lead to the rejection of the null hypothesis of a linear relationship between cyclical output and cyclical unemployment. The asymmetry implies the existence of four regimes. For lower or higher values of cyclical unemployment, it follows that there is a relatively strong negative correlation between unemployment rate and output. However, when unemployment stands at intermediate levels, this relationship tends to weaken.

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File URL: http://www.accessecon.com/pubs/EB/2008/Volume5/EB-08E20011A.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 5 (2008)
Issue (Month): 33 ()
Pages: 1-14

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Handle: RePEc:ebl:ecbull:eb-08e20011
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  1. Hurlin, Christophe, 2006. "Network effects of the productivity of infrastructure in developing countries," Policy Research Working Paper Series 3808, The World Bank.
  2. Brian Silverstone & Richard Harris, 2001. "Testing for asymmetry in Okun's law: A cross-country comparison," Economics Bulletin, AccessEcon, vol. 5(2), pages 1-13.
  3. Lee, Jim, 2000. "The Robustness of Okun's Law: Evidence from OECD Countries," Journal of Macroeconomics, Elsevier, vol. 22(2), pages 331-356, April.
  4. Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics 0346, Faculty of Economics, University of Cambridge.
  5. 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.
  6. 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..
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