Did Okun’s law die after the Great Recession?

Giorgio Canarella and Stephen Miller

Business Economics, 2017, vol. 52, issue 4, No 5, 216-226

Abstract: Abstract This paper estimates Okun’s law, focusing on piecewise non-linearity in the form of structural breaks and threshold dynamics, and obtains regime-dependent as well as threshold-dependent changes in the unemployment rate. We employ an autoregressive distributed lag version of Okun’s law in first differences, which allows for delayed reactions of the unemployment rate to output growth. Applied to U.S. data over 1949Q1–2015Q4, the empirical analysis characterizes Okun’s law as a three-regime relationship with the first structural break coinciding with the 1973 oil price shock, and the second structural break immediately following the end of the Great Recession. We find support for threshold dynamics in each regime, which suggests that Okun’s law follows complex non-linear dynamics. Okun’s law, as a linear and constant “rule of thumb,” breaks down in each of the three regimes. In each regime, the unemployment rate responds asymmetrically to changes in output. In sum, Okun’s law died during the Great Recession. Only time will tell whether resurrection is feasible.

Keywords: Okun’s law; Structural breaks; Threshold effects (search for similar items in EconPapers)
JEL-codes: C14 C22 E31 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://link.springer.com/10.1057/s11369-017-0045-1 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Did Okun's Law Die after the Great Recession? (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:buseco:v:52:y:2017:i:4:d:10.1057_s11369-017-0045-1

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/11369

DOI: 10.1057/s11369-017-0045-1

Access Statistics for this article

Business Economics is currently edited by Charles Steindel

More articles in Business Economics from Palgrave Macmillan, National Association for Business Economics Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().