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Cross-country Evidence on a Nonlinear Okun Curve


  • Virén, Matti


This paper presents cross-country evidence on a nonlinear Okun curve. The analysis is based on a simple error-correction model of unemployment. The model is estimated using a threshold model estimator. Evidence from 20 OECD countries for 1960-1997 gives support for the existence of nonlinearities in terms of the output growth effects. Output growth has a strong effect on unemployment when unemployment is low and output is high, and vice versa. Thus, in bad times, the effect of output growth on unemployment can be close to zero. In addition to this nonlinear output effect, also the population growth effect appears to be of similar type. The above mentioned basic results turn out to be robust in terms of estimation method (single equation vs pooled data estimation) and specification of the threshold variable.

Suggested Citation

  • Virén, Matti, 2000. "Cross-country Evidence on a Nonlinear Okun Curve," Discussion Papers 239, VATT Institute for Economic Research.
  • Handle: RePEc:fer:dpaper:239

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    References listed on IDEAS

    1. Kiander, Jaakko & Virén, Matti, 1998. "Employment Growth and Labour Market Flexibility in OECD Countries," Discussion Papers 184, VATT Institute for Economic Research.
    2. Richard Harris & Brian Silverstone, 2000. "Asymmetric Adjustment of Unemployment and Output in New Zealand: Rediscovering Okun's Law," Working Papers in Economics 00/02, University of Waikato.
    3. Prachowny, Martin F J, 1993. "Okun's Law: Theoretical Foundations and Revised Estimates," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 331-336, May.
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