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Okun’s law revisited in the time–frequency domain: introducing unemployment into a wavelet-based control model

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  • Patrick M. Crowley

    (Texas A&M University-Corpus Christi)

  • David Hudgins

    (Texas A&M University-Corpus Christi)

Abstract

This paper integrates the Okun’s law (OL) relationship into a wavelet-based control (WBC) model to compare simulated optimal fiscal and monetary policy for the US when the policymakers place varying emphasis on the primary macroeconomic targets of unemployment, output growth, and inflation. The simulation results show that the unemployment rate is impacted differently across frequency ranges. We find that fiscal policy is the most aggressive when economic growth is emphasized as a policy objective, whereas monetary policy is relatively more aggressive when the inflation rate is emphasized. Given that the US inflation rate was below target for the start of the simulation exercises, when it is emphasized, that leads to lower interest rates, a depreciated exchange rate, and larger aggregate investment. We also find that introducing OL into a WBC model leads to less expansionary fiscal and monetary policies when unemployment is initially low.

Suggested Citation

  • Patrick M. Crowley & David Hudgins, 2021. "Okun’s law revisited in the time–frequency domain: introducing unemployment into a wavelet-based control model," Empirical Economics, Springer, vol. 61(5), pages 2635-2662, November.
    • Handle: RePEc:spr:empeco:v:61:y:2021:i:5:d:10.1007_s00181-020-01980-7
    DOI: 10.1007/s00181-020-01980-7
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    References listed on IDEAS

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    1. Aguiar-Conraria, Luis & Martins, Manuel M.F. & Soares, Maria Joana, 2018. "Estimating the Taylor rule in the time-frequency domain," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 122-137.
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    Cited by:

    1. Fratianni, Michele & Gallegati, Marco & Giri, Federico, 2022. "The medium-run Phillips curve: A time–frequency investigation for the UK," Journal of Macroeconomics, Elsevier, vol. 73(C).
    2. Patrick M. Crowley & David Hudgins, 2022. "Monetary policy objectives and economic outcomes: What can we learn from a wavelet‐based optimal control approach?," Manchester School, University of Manchester, vol. 90(2), pages 144-170, March.
    3. David Hudgins & Patrick M. Crowley, 2023. "Resilient Control for Macroeconomic Models," Computational Economics, Springer;Society for Computational Economics, vol. 61(4), pages 1403-1431, April.

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