Abstract
As useful barometers of the macroeconomy, output and unemployment dynamics are relevant for markets, policymakers and the average economic agent. This paper relaxes the two-regime assumption of existing models of their relationship (the so-called Okun's law) motivated by a literature that documents three phases of the business cycle. Using U.S. data for 1949–2020, a threshold regression of output and unemployment is estimated, which allows for a straightforward extension of previous linear and two-regime models. The results reveal a steepening of Okun's relationship across three endogenously-determined regimes that align closely with expansions, mild recessions and deep recessions. The steepening is robust to a battery of considerations. Meanwhile, the variation in Okun's coefficient correlates with changes in the average deviation of nominal wages from the median. These findings uncover the need for differentiated policy responses across recessions.
| Original language | English (US) |
|---|---|
| Article number | 105858 |
| Journal | Economic Modelling |
| Volume | 112 |
| DOIs | |
| State | Published - Jul 2022 |
Bibliographical note
Funding Information:Helpful research assistance from Hattie Ecklund and valuable suggestions and comments from the Editor, the Associate Editor, two anonymous referees and seminar participants at Universidad del Pacífico, the University of Minnesota - Duluth, the 2020 Symposium of the Society for Nonlinear Dynamics and Econometrics and the 2020 International Conference on Computational and Financial Econometrics are gratefully acknowledged. All remaining errors are my own.
Publisher Copyright:
© 2022 Elsevier B.V.
Keywords
- Business cycles
- Okun's law
- Threshold autoregression
- Unemployment