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Nonlinearities and fractional integration in the US unemployment rate

  • Luis A. Gil-Alana

    ()

    (University of Navarra)

  • Guglielmo M. Caporale

    ()

    (Brunel University)

This paper proposes a model of the US unemployment rate which accounts for both its asymmetry and its long memory. Our approach introduces fractional integration and nonlinearities simultaneously into the same framework, using a Lagrange Multiplier procedure with a standard null limit distribution. The empirical results suggest that the US unemployment rate can be specified in terms of a fractionally integrated process, which interacts with some non-linear functions of labour demand variables such as real oil prices and real interest rates. We also find evidence of a long-memory component. Our results are consistent with a hysteresis model with path dependency rather than a NAIRU model with an underlying unemployment equilibrium rate, thereby giving support to more activist stabilisation policies. However, any suitable model should also include business cycle asymmetries, with implications for both forecasting and policy-making.

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File URL: http://www.unav.edu/documents/10174/6546776/1188474560_wp_Gil_Alana_03.pdf
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Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 18/06.

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Length: 39 pages
Date of creation: 04 Dec 2006
Date of revision:
Handle: RePEc:una:unccee:wp1806
Contact details of provider: Web page: http://www.unav.edu/web/facultad-de-ciencias-economicas-y-empresariales

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  1. Luis Gil-Alana, 2003. "Seasonal Misspecification in the Context of Fractionally Integrated Univariate Time Series," Computational Economics, Society for Computational Economics, vol. 22(1), pages 65-74, August.
  2. Gil-Alana, Luis A., 1999. "Testing fractional integration with monthly data," Economic Modelling, Elsevier, vol. 16(4), pages 613-629, December.
  3. Gil-Alana, L. A. & Robinson, P. M., 1997. "Testing of unit root and other nonstationary hypotheses in macroeconomic time series," Journal of Econometrics, Elsevier, vol. 80(2), pages 241-268, October.
  4. Bentolila, Samuel & Bertola, Giuseppe, 1990. "Firing Costs and Labour Demand: How Bad Is Eurosclerosis?," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 381-402, July.
  5. Marco Bianchi & Gylfi Zoega, 1996. "Unemployment persistence: Does the size of the shock matter?," Bank of England working papers 50, Bank of England.
  6. Cross, Rod, 1994. "The Macroeconomic Consequences of Discontinuous Adjustment: Selective Memory of Non-dominated Extrema," Scottish Journal of Political Economy, Scottish Economic Society, vol. 41(2), pages 212-21, May.
  7. Gil-Alana, Luis A., 2002. "Seasonal long memory in the aggregate output," Economics Letters, Elsevier, vol. 74(3), pages 333-337, February.
  8. Mehmet Caner & Bruce E. Hansen, 2001. "Threshold Autoregression with a Unit Root," Econometrica, Econometric Society, vol. 69(6), pages 1555-1596, November.
  9. Daniel S. Hamermesh & Gerard A. Pfann, 1996. "Adjustment Costs in Factor Demand," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1264-1292, September.
  10. Ramsey, J.B. & Rothman, P., 1993. "Time Irreversibility and Business Cycle Asymmetry," Working Papers 93-39, C.V. Starr Center for Applied Economics, New York University.
  11. Eitrheim, Oyvind & Terasvirta, Timo, 1996. "Testing the adequacy of smooth transition autoregressive models," Journal of Econometrics, Elsevier, vol. 74(1), pages 59-75, September.
  12. Alan A. Carruth & Mark A. Hooker & Andrew J. Oswald, 1998. "Unemployment Equilibria And Input Prices: Theory And Evidence From The United States," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 621-628, November.
  13. Philip Rothman, . "Forecasting Asymmetric Unemployment Rates," Working Papers 9618, East Carolina University, Department of Economics.
  14. Skalin, Joakim & Ter svirta, Timo, 2002. "Modeling Asymmetries And Moving Equilibria In Unemployment Rates," Macroeconomic Dynamics, Cambridge University Press, vol. 6(02), pages 202-241, April.
  15. Guglielmo Maria Caporale & Luis Gil-Alana, 2002. "Unemployment and input prices: a fractional cointegration approach," Applied Economics Letters, Taylor & Francis Journals, vol. 9(6), pages 347-351.
  16. L. A. Gil-Alaña & Peter M. Robinson, 2001. "Testing of seasonal fractional integration in UK and Japanese consumption and income," LSE Research Online Documents on Economics 298, London School of Economics and Political Science, LSE Library.
  17. Gil-Alana, Luis A., 2000. "Mean reversion in the real exchange rates," Economics Letters, Elsevier, vol. 69(3), pages 285-288, December.
  18. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April.
  19. Franses, Ph.H.B.F. & Paap, R., 1998. "Modelling asymmetric persistence over the business cycle," Econometric Institute Research Papers EI 9852, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  20. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April.
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