Testing Okun's Law using threshold cointegration and Vector Error Correction Model under the asymetric effects: The case of Turkey

TARI R. , Abasiz T.

IKTISAT ISLETME VE FINANS, vol.25, no.291, pp.53-77, 2010 (Journal Indexed in SSCI) identifier

  • Publication Type: Article / Article
  • Volume: 25 Issue: 291
  • Publication Date: 2010
  • Doi Number: 10.3848/iif.2010.291.2600
  • Title of Journal : IKTISAT ISLETME VE FINANS
  • Page Numbers: pp.53-77


Okun's Law relies on the assumption that the relationship between output and unemployment is symmetrical. The assumption of symmetry suggests that the direction and the dimension of the changes at output level are not at a considerable magnitude, and the impact of the growth rate on unemployment is not the same in the periods of expansion and contraction. The suggested impact was ruled out and how Okun coefficient varied in the periods of contraction and expansion was tested using two-regime threshold cointegration and threshold error correction models. The findings demonstrate that the fluctuations in growth regime affect unemployment more than they do in recession regime, where the impact of growth on unemployment is asymmetrical. The Okun's coefficient was found -0.48 in long term. Another finding from the study is that unemployment rate in typical regime was not affected from the fluctuations in growth and this indicates the jobless recovery