Asymmetric Unemployment-Output Tradeoff in the Eurozone

Bo Tang and Carlos Bethencourt

MPRA Paper from University Library of Munich, Germany

Abstract: This study investigates the asymmetric unemployment-output tradeoff in the Eurozone. Building upon the augmented Okun’s law framework, the relationships between unemployment and output cannot be correctly specified in the static linear, static asymmetric and dynamic linear regressions. By contrast, the nonlinear autoregressive distributed lag (NARDL) model is well-specified and in this case indicates that the nature of Okun’s law is asymmetric. For the Eurozone, the NARDL estimates demonstrate that labour markets quickly respond to cyclical outputs in a short period, while the adjustments towards new equilibrium become weak in the long run. Furthermore, the cross-sectional analysis of long run asymmetries indicates that government spending and trade balance are key factors affecting the asymmetric unemployment-output tradeoff. Thus, these results seem to suggest that, in spite of the fact that member states lack monetary sovereignty, flexible application of fiscal reforms or labour market reforms could help to reduce asymmetric effects.

Keywords: unemployment-output tradeoff; nonlinear autoregressive distributed lag (NARDL); asymmetry determinants. (search for similar items in EconPapers)
JEL-codes: C22 E32 J64 (search for similar items in EconPapers)
Date: 2015-06
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 (5)

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