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Okun's Law, Asymmetries and Regional Spillovers: Evidence from Virginia Metropolitan Statistical Areas and the District of Columbia

Rui Pereira

No 140, Working Papers from Department of Economics, College of William and Mary

Abstract: The purpose of this paper is to examine the strength of the relationship between unemployment and GDP, the extent to which this relationship has been stable in Virginia metropolitan statistical areas (MSA) during the Great Recession and to examine the importance of regional spillovers in Okun’s law. Our results suggest that regional spillovers are very important in local labor markets and in defining the relationship observed at the national level. The MSA level data further supports asymmetries in Okun's law. The weaker direct relationship between GDP and unemployment at the local level suggests that while federal fiscal and monetary policies to stimulate aggregate demand during periods of economic recovery may be effective, over time, in reducing the unemployment rate, local economic development policies are not effective in achieving the substantial short term reduction in unemployment needed during recovery. The strong business cycle effects observed in the state MSA, relative to the U.S., suggests that countercyclical policies are fundamentally important and should be targeted more generally to exploit regional spillovers.

Keywords: Okun's law; the Great Recession; Regional Spillovers; Panel Unit Root Test with Structural Breaks; Panel Spatial Durbin Model. (search for similar items in EconPapers)
JEL-codes: C23 E24 E32 J01 R12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-ure
Date: 2014-03-26
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