Okun's Law: Copula-based Evidence from G7 Countries

Nikos Benos () and Athanassios Stavrakoudis

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we present evidence on the association between unemployment and output in the G7 economies, which has direct implications for the validity of Okun's Law. Specifically, we investigate dependence and asymmetry between the residuals of the output and unemployment first difference equations using the copula methodology. We find that dependence between GDP and unemployment disturbances is strong only in USA and France followed by Canada, the UK and Germany. There is no dependence in Italy and Japan. This enhances the validity of Okun's Law in the former countries without invalidating it in Italy and Japan, since there is still a negative relationship given by the systematic part of the output-unemployment difference equations estimates. Also, there is asymmetry in the former five countries. Output disturbances are associated with unemployment ones only during recessions, while they are completely disentangled throughout contractions in the US, France, Canada, the UK and Germany. These findings imply that USA and France, and less so Canada, Great Britain and Germany provide the most favorable environment for counter-cyclical economic policies. In these economies, policy makers should react more than output-unemployment dynamic equations dictate in case of output slumps. However, during recoveries in these countries and in Italy as well as Japan during the whole business cycle, authorities ought to base stabilization policies solely on the systematic part of the relation between output and unemployment changes. Our results provide guidance to policy makers in addition to what is suggested by traditional empirical approaches, which focus on the estimation of the deterministic part of the output-unemployment relationship.

Keywords: Okun's Law; Dependence; Copula; Asymmetry (search for similar items in EconPapers)
JEL-codes: C14 E10 E32 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Okun's law: Copula-based evidence from G7 countries (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:103318

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