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Are there more than three regimes in the output-unemployment relationship? A panel quantile regression estimates of Okun's gap model in EU countries

Author

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  • Mindaugas BUTKUS

    (Vilnius University, Lithuania)

  • Laura DARGENYTE-KACILEVICIENE

    (Vilnius University, Lithuania)

  • Kristina MATUZEVICIUTE

    (Vilnius University, Lithuania)

  • Dovile RUPLIENE

    (Vilnius University, Lithuania)

  • Janina SEPUTIENE

    (Vilnius University, Lithuania)

Abstract

Until recently, the output-unemployment relationship (Okun's coefficient) was believed to follow two regimes, implying a uniform effect of expansionary fiscal policy on unemployment during economic booms and declines. However, research by Oh (2018) and Donayre (2022) introduced a three-regime approach, suggesting this relationship varies over different economic phases. Building on this, we propose a multinomial Okun's coefficient model using a gap model and quantile regression to estimate the coefficient at various unemployment levels. Our findings reveal that Okun's coefficient is significantly higher during severe recessions and lower at the onset of economic decline compared to the two-regime model. This indicates that the effectiveness of expansionary fiscal policy in reducing unemployment is limited when implemented at the start of a recession and is more effective during severe recessions, suggesting a need to re-evaluate the timing of such policies.

Suggested Citation

  • Mindaugas BUTKUS & Laura DARGENYTE-KACILEVICIENE & Kristina MATUZEVICIUTE & Dovile RUPLIENE & Janina SEPUTIENE, 2024. "Are there more than three regimes in the output-unemployment relationship? A panel quantile regression estimates of Okun's gap model in EU countries," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 15, pages 201-218, June.
    • Handle: RePEc:jes:journl:y:2024:v:15:p:201-218
    DOI: https://doi.org/10.47743/ejes-2024-0109
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    References listed on IDEAS

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    1. Philippe Askenazy & Christine Erhel, 2015. "Okun’s Laws Differentiated by Education," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01297704, HAL.
    2. Myeong Jun Kim & Sung Y. Park, 2019. "Do gender and age impact the time‐varying Okun's law? Evidence from South Korea," Pacific Economic Review, Wiley Blackwell, vol. 24(5), pages 672-685, December.
    3. Angana Banerji & Ms. Huidan Huidan Lin & Mr. Sergejs Saksonovs, 2015. "Youth Unemployment in Advanced Europe: Okun’s Law and Beyond," IMF Working Papers 2015/005, International Monetary Fund.
    4. Marcel Novák & Ľubomír Darmo, 2019. "Okun´s Law over the Business Cycle: Does it Change in the EU Countries after the Financial Crisis?," Prague Economic Papers, Prague University of Economics and Business, vol. 2019(2), pages 235-254.
    5. Jong-seok Oh, 2018. "Changes in cyclical patterns of the USA labor market: from the perspective of nonlinear Okun’s law," International Review of Applied Economics, Taylor & Francis Journals, vol. 32(2), pages 237-258, March.
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