A flexible nonlinear inference to Okun's relationship

Abstract

The study implements the flexible nonlinear inference approach of Hamilton (2001) to assess the validity of Okun's law. Using US quarterly data from 1948:1 to 2004:2, overwhelming evidence is found of nonlinearity between cyclical components of unemployment and output. However, the relationship is still negative and provides strong support of (nonlinear) Okun's law.

Acknowledgements

The authors are grateful to Professor James D. Hamilton for kindly making publicly available the computer codes used in this paper. Each author blames the other for the remaining errors.

Notes

¹  http://research.stlouisfed.org/fred2/

² In fact, similar results are found using the HP filtering data. Results are available upon request.

³ According to the one minimizing AIC or BIC, the lag order is chosen to be 2.