Threshold effects in Okun's Law: a panel data analysis

Economics Bulletin, 2008, vol. 5, issue 33, 1-14

Abstract: Our approach involves the use of switching regime models, to take account of the structural asymmetry and time instability of Okun's coefficient. More precisely, we apply the non-dynamic panel transition regression model introduced by Hansen (1999) to a panel of 20 OECD countries over the last three decades. With all specifications applied, the tests lead to the rejection of the null hypothesis of a linear relationship between cyclical output and cyclical unemployment. The asymmetry implies the existence of four regimes. For lower or higher values of cyclical unemployment, it follows that there is a relatively strong negative correlation between unemployment rate and output. However, when unemployment stands at intermediate levels, this relationship tends to weaken.

Keywords: Threshold; Panel; Regression; Models (search for similar items in EconPapers)
JEL-codes: C2 E2 (search for similar items in EconPapers)
Date: 2008-11-02
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