Okun's Law Revisited

13 Pages Posted: 11 Jul 2003

See all articles by Jesús Crespo Cuaresma

Jesús Crespo Cuaresma

University of Innsbruck - Department of Economic Theory, Economic Policy and Economic History

Abstract

In the light of modern theoretical studies, the negative relationship between output and unemployment may take a nonlinear form, in the sense that changes in output can cause asymmetric changes in the unemployment rate. A regime-dependent specification of Okun's law, where the inverse relationship between cyclical unemployment and cyclical GDP is allowed to differ across recessions and expansions, is estimated for the US economy. Using both the Hodrick-Prescott filter and a bivariate structural time series model to isolate the cyclical component of the variables of interest, the nonlinear specification is highly significant when tested against the linear alternative independently of the method used for extracting the cycle of unemployment and GDP. The estimation results imply that the contemporaneous effect of growth on unemployment is asymmetric and significantly higher in recessions than in expansions, and shocks to unemployment tend to be more persistent in the expansionary regime.

Suggested Citation

Crespo Cuaresma, Jesús, Okun's Law Revisited. Oxford Bulletin of Economics and Statistics, Vol. 65, pp. 439-451, September 2003. Available at SSRN: https://ssrn.com/abstract=423646

Jesús Crespo Cuaresma (Contact Author)

University of Innsbruck - Department of Economic Theory, Economic Policy and Economic History ( email )

Universitaetsstrasse 15
Innsbruck, A - 6020
Austria

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