Investigating Asymmetry Inside the Regimes in Okun's Law: The Markov Switching Approach

Document Type : Original Article


1 MA in Economics, Faculty of Economics and Administrative Sciences, University of Mazandaran, Babolsar, Iran

2 Associate Professor of Economics, Faculty of Economics and Administrative Sciences, University of Mazandaran, Babolsar, Iran



Unemployment is one of the major economic problems of countries and its decline is always on the focus of researchers and policy makers. Okun found a negative relationship between production and unemployment. Since then, there have been many studies about how unemployment affects production within Okun's law framework; but the results vary in different countries and in different times (boom or recession). Since the results are accompanied with distinct policy implication, a reexamination of this empirical law using a new econometric method seems necessary. This study, using Markov switching approach, examines the validity of Okun's law from the asymmetry perspective across the regimes based on Iran’s data 2018:1-1978:1. The results show that the effect of unemployment on production is asymmetric and nonlinear; so that changes in unemployment do not affect production gap during the boom, but during the recession, positive and negative shocks have a significant effect on the production gap. That is, the reduction in unemployment will more severely affect the production gap in recession.


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