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Nonlinearities and fractional integration in the US unemployment rate

Author

Listed:
  • Luis A. Gil-Alana

    (University of Navarra)

  • Guglielmo M. Caporale

    (Brunel University)

Abstract

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.

Suggested Citation

  • Luis A. Gil-Alana & Guglielmo M. Caporale, 2006. "Nonlinearities and fractional integration in the US unemployment rate," Faculty Working Papers 18/06, School of Economics and Business Administration, University of Navarra.
    • Handle: RePEc:una:unccee:wp1806
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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