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The Great Recession and Okun's law

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  • Grant, Angelia L.

Abstract

The relationship between output and unemployment has been a widely discussed topic since the Great Recession. This paper jointly estimates a time-varying parameter Okun's law with two latent states: potential output and the natural rate of unemployment. It is found that there is substantial time variation in the Okun's coefficient in the US. Since the Great Recession, a given unemployment gap has been associated with a smaller output gap. The probability that the Okun's coefficient is equal to the widely accepted value of −2 fell significantly during the Great Recession, but has since risen despite the Okun's coefficient remaining at around −0.5. This illustrates the significant degree of uncertainty in the estimation of potential output and the natural rate of unemployment.

Suggested Citation

  • Grant, Angelia L., 2018. "The Great Recession and Okun's law," Economic Modelling, Elsevier, vol. 69(C), pages 291-300.
  • Handle: RePEc:eee:ecmode:v:69:y:2018:i:c:p:291-300
    DOI: 10.1016/j.econmod.2017.10.002
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    Cited by:

    1. Kavese Kambale & Phiri Andrew, 2020. "A Provincial Perspective of Nonlinear Okun’s Law for Emerging Markets: The Case of South Africa," Studia Universitatis „Vasile Goldis” Arad – Economics Series, Sciendo, vol. 30(3), pages 59-76, September.
    2. Porras-Arena, M. Sylvina & Martín-Román, Ángel L., 2019. "Self-employment and the Okun's law," Economic Modelling, Elsevier, vol. 77(C), pages 253-265.
    3. Mbekeni, Lutho & Phiri, Andrew, 2019. "South African unemployment in the post-financial crisis era: What are the determinants?," MPRA Paper 94159, University Library of Munich, Germany.

    More about this item

    Keywords

    Time variation; Output gap; Unemployment gap;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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