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Exploring Okun’s law asymmetry: an endogenous threshold LSTR approach

Author

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  • Christopoulos, Dimitris
  • McAdam, Peter
  • Tzavalis, Elias

Abstract

Using a novel methodology, we offer new evidence that a threshold relationship exists for Okun’s law. We use a logistic smoothed transition regression (LSTR) model where possible threshold endogeneity is addressed based on copula theory. We also suggest a new test of the linearity hypothesis against the LSTR model. A combination of structural and policy-related variables accounts for changes (rises) in the Okun’s parameter in the US in recent decades. Accordingly, the unemployment gap is increasingly associated with a smaller output gap. Whilst the Great Recession accelerated that rise, the bulk of the change occurred beforehand. JEL Classification: C46, E23, E24, C24

Suggested Citation

  • Christopoulos, Dimitris & McAdam, Peter & Tzavalis, Elias, 2019. "Exploring Okun’s law asymmetry: an endogenous threshold LSTR approach," Working Paper Series 2345, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20192345
    Note: 50336
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2345~70e2259959.en.pdf
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    Citations

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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. Hans-Eggert Reimers & Dieter Gerdesmeier & Barbara Roffia, 2023. "Investigating the Inflation–Output Nexus for the Euro Area: Old Questions and New Results," Economies, MDPI, vol. 11(11), pages 1-15, October.
    3. Shabir Mohsin Hashmi & Ali Gul Khushik & Muhammad Akram Gilal & Zhao Yongliang, 2021. "The Impact of GDP and Its Expenditure Components on Unemployment Within BRICS Countries: Evidence of Okun’s Law From Aggregate and Disaggregated Approaches," SAGE Open, , vol. 11(2), pages 21582440211, June.

    More about this item

    Keywords

    asymmetries; copula; endogeneity; logistic transition; Monte Carlo; output; test for linearity; unemployment;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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