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

Dimitris Christopoulos, Peter McAdam () and Elias Tzavalis

No 2345, Working Paper Series from European Central Bank

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

Keywords: asymmetries; copula; endogeneity; logistic transition; Monte Carlo; output; test for linearity; unemployment (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-mac
Note: 50336
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20192345

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