Threshold effects in Okun's law: a panel data analysis

Julien Fouquau

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Abstract: Our approach involves the use of switching regime models, to take account of the structural asymmetry and time instability of Okun's coefficient. More precisely, we apply the non-dynamic panel transition regression model introduced by Hansen (1999) to a panel of 20 OECD countries over the last three decades. With all specifications applied, the tests lead to the rejection of the null hypothesis of a linear relationship between cyclical output and cyclical unemployment. The asymmetry implies the existence of four regimes. For lower or higher values of cyclical unemployment, it follows that there is a relatively strong negative correlation between unemployment rate and output. However, when unemployment stands at intermediate levels, this relationship tends to weaken.

Date: 2008-10-01
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Published in Economics Bulletin, 2008, vol. 5, n° 33, pp. 1-14

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Journal Article: Threshold effects in Okun's Law: a panel data analysis (2008)
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