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Okun's Law across the Business Cycle and during the Great Recession: A Markov Switching Analysis

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  • Rui M. Pereira

    () (Department of Economics, The College of William and Mary)

Abstract

The substantial increase in unemployment during the Great Recession, coupled with the possibility of a breakdown in Okun's law, gave rise to concerns of a structural increase in the natural rate of unemployment. We estimate asymmetries in Okun's law using quarterly data from 1948:01-2012:04 across the business cycle as defined by exogenous breaks for the period after the peak of the business cycle to the trough. We further allow for endogenous break points by estimating a markov switching model. The estimated asymmetries rely on adequate specification of the dynamics of the relationship. The non-linearities in Okun's law provide strong support for an understanding of deviations in Okun's law during the Great Recession as a natural by-product of a stronger relationship between GDP growth during contractions than recoveries, although this fails to explain the entirety of the weak labor market conditions during the tepid recovery in economic activity. This similarly contributes towards an understanding of the phenomena of jobless recoveries which are a product of weak economic growth in recent decades coupled with a weaker relationship between GDP growth and unemployment during expansions. In this respect, the Great Recession, despite the relatively larger contraction in economic activity, was no different from previous recessions.

Suggested Citation

  • Rui M. Pereira, 2013. "Okun's Law across the Business Cycle and during the Great Recession: A Markov Switching Analysis," Working Papers 139, Department of Economics, College of William and Mary.
  • Handle: RePEc:cwm:wpaper:139
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    File URL: http://economics.wm.edu/wp/cwm_wp139.pdf
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    References listed on IDEAS

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    10. Michelle L. Barnes & Fabià Gumbau-Brisa & Giovanni P. Olivei, 2013. "Do real-time Okun's law errors predict GDP data revisions?," Working Papers 13-3, Federal Reserve Bank of Boston.
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    Citations

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    Cited by:

    1. van Ours, J.C., 2015. "The Great Recession was not so Great," Discussion Paper 2015-006, Tilburg University, Center for Economic Research.
    2. Robert Dixon & G. C. Lim & Jan C. van Ours, 2016. "Revisiting Okun’s Relationship," Melbourne Institute Working Paper Series wp2016n14, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    3. Klinger, Sabine & Weber, Enzo, 2014. "On GDP-employment decoupling in Germany," IAB Discussion Paper 201421, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    4. repec:eee:joecas:v:13:y:2016:i:c:p:81-88 is not listed on IDEAS
    5. van Ours, Jan C., 2015. "The Great Recession was not so Great," CEPR Discussion Papers 10376, C.E.P.R. Discussion Papers.
    6. Rui Pereira, 2014. "Okun’s law, asymmetries and regional spillovers: evidence from Virginia metropolitan statistical areas and the District of Columbia," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 52(2), pages 583-595, March.
    7. van Ours, Jan C., 2015. "The Great Recession was not so great," Labour Economics, Elsevier, vol. 34(C), pages 1-12.
    8. Klinger, Sabine & Weber, Enzo, 2015. "GDP-Employment Decoupling and the Productivity Puzzle in Germany," University of Regensburg Working Papers in Business, Economics and Management Information Systems 485, University of Regensburg, Department of Economics.

    More about this item

    Keywords

    Okun's law; the Great Recession; Business Cycle; Auto-regressive distributed lag; Markov Switching.;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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