Is There Really Hysteresis in OECD Countries’ Unemployment Rates? New Evidence Using a Fourier Panel Unit Root Test

Tolga Omay, Muhammad Shahbaz and Chris Stewart

MPRA Paper from University Library of Munich, Germany

Abstract: We investigate the hysteresis hypothesis by proposing a heterogeneous panel unit root test that allows for gradually changing trends and cross-sectional dependence (CSD) among panel members using a flexible Fourier form. Inconclusive results from previous studies are potentially due to using very restrictive specifications with homogenous break structures and/or exogenously determined abrupt breaks. We seek to address these limitations by employing general specifications that are more capable of characterising the true data generation process of unemployment and by allowing for spill-over effects using a bootstrapping procedure to accommodate CSD that must be considered in a globalized world. Extensive simulations suggest that the failure to take structural breaks and CSD into account can lead to misleading conclusions about whether the unemployment rate is stationarity. We apply our test procedure to unemployment data for 23 OECD countries and find conclusive evidence against the hysteresis hypothesis for all these countries.

Keywords: Smooth Break; Panel Unit Root; Cross Section Dependency; CCE; Hysteresis (search for similar items in EconPapers)
JEL-codes: E0 (search for similar items in EconPapers)
Date: 2021-05-01, Revised 2021-05-10
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (8)

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