Christopoulos, Dimitris McAdam, Peter Tzavalis, Elias
Year of Publication:
ECB Working Paper No. 2345
Using a novel methodology, we offer new evidence that a threshold relationship exists for Okun's law. We use a logistic smoothed transition regression (LSTR) model where possible threshold endogeneity is addressed based on copula theory. We also suggest a new test of the linearity hypothesis against the LSTR model. A combination of structural and policy-related variables accounts for changes (rises) in the Okun's parameter in the US in recent decades. Accordingly, the unemployment gap is increasingly associated with a smaller output gap. Whilst the Great Recession accelerated that rise, the bulk of the change occurred beforehand.
unemployment output asymmetries logistic transition endogeneity copula Monte Carlo test for linearity