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

Document Type : Original Article

Authors

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

10.29252/ecoj.10.3.231

Abstract

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.

Keywords

References

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Journal of Economics and Modelling
Volume 10, Issue 3 - Serial Number 39
December 2019
Pages 207-232

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