Nonlinearities and Fractional Integration in the US Unemployment Rate

24 Pages Posted: 20 Jul 2007

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Luis A. Gil-Alana

University of Navarra - Department of Economics

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 nonlinear functions of labor-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 non-accelerating inflation rate of unemployment (NAIRU) model with an underlying unemployment equilibrium rate, thereby giving support to more activist stabilization policies. However, any suitable model should also include business cycle asymmetries, with implications for both forecasting and policy-making.

Suggested Citation

Caporale, Guglielmo Maria and Gil-Alana, Luis A., Nonlinearities and Fractional Integration in the US Unemployment Rate. Oxford Bulletin of Economics and Statistics, Vol. 69, No. 4, pp. 521-544, August 2007, Available at SSRN: https://ssrn.com/abstract=1001806 or http://dx.doi.org/10.1111/j.1468-0084.2007.00449.x

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance ( email )

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HOME PAGE: http://www.brunel.ac.uk/about/acad/bbs/bbsstaff/ef_staff/guglielmocaporale/

London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Luis A. Gil-Alana (Contact Author)

University of Navarra - Department of Economics ( email )

Campus de Arrosadia
Pamplona, 31006
Spain

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