Explaining deviations from Okun’s law

Claudia Foroni and Francesco Furlanetto

No 2699, Working Paper Series from European Central Bank

Abstract: Despite its stability over time, as for any statistical relationship, Okun’s law is subject to deviations that can be large at times. In this paper, we provide a mapping between residuals in Okun’s regressions and structural shocks identified with a SVAR model by inspecting how unemployment responds to the state of the economy. We show that deviations from Okun’s law are a natural and expected outcome once one takes a multi-shock perspective, as long as shocks to automation, labour supply and structural factors in the labour market are taken into account. Our simple recipe for policy makers is that, if a positive deviation from Okun’s law arises, it is likely to be generated by either positive labour supply or automation shocks or by negative structural factors shocks. JEL Classification: E24, E32, C32

Keywords: Bayesian VAR; Business cycle fluctuations; labour markets; Okun’s law (search for similar items in EconPapers)
Date: 2022-08
Note: 3243564
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Related works:
Working Paper: Explaining Deviations from Okun’s Law (2022)
Working Paper: Explaining Deviations from Okun's Law (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222699

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