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

Patrick Crowley and David Hudgins

Empirical Economics, 2021, vol. 61, issue 5, No 12, 2635-2662

Abstract: 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.

Keywords: Discrete wavelet analysis; Monetary policy; Okun’s law; Optimal control; C61; C63; C88; E52; E61; F47 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s00181-020-01980-7

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