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Macroeconomic shocks and Okun’s Law

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  • Ziegenbein, Alexander

Abstract

I propose a simple method to estimate a macro shock-specific Okun elasticity, which characterises by how much the unemployment rate falls when output increases by one percentage point because of a specific macroeconomic shock. Using data for the US, I consider government spending, tax, monetary policy, financial, technology, and oil shocks. I find the Okun elasticity is largely stable across shocks, but subtle differences emerge: (i) the elasticity is larger for financial shocks, (ii) the speed at which unemployment adjusts relative to output depends on the shock driving fluctuations.

Suggested Citation

  • Ziegenbein, Alexander, 2021. "Macroeconomic shocks and Okun’s Law," Economics Letters, Elsevier, vol. 202(C).
    • Handle: RePEc:eee:ecolet:v:202:y:2021:i:c:s0165176521001038
    DOI: 10.1016/j.econlet.2021.109826
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    References listed on IDEAS

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    8. Mikkel Plagborg‐Møller & Christian K. Wolf, 2021. "Local Projections and VARs Estimate the Same Impulse Responses," Econometrica, Econometric Society, vol. 89(2), pages 955-980, March.
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    Cited by:

    1. Foroni, Claudia & Furlanetto, Francesco, 2022. "Explaining Deviations from Okun's Law," CEPR Discussion Papers 17369, C.E.P.R. Discussion Papers.
    2. Knut Lehre Seip & Dan Zhang, 2022. "A High-Resolution Lead-Lag Analysis of US GDP, Employment, and Unemployment 1977–2021: Okun’s Law and the Puzzle of Jobless Recovery," Economies, MDPI, vol. 10(10), pages 1-16, October.

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    More about this item

    Keywords

    Okun’s Law; Instrumental variables; Economic fluctuations;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • 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
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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