Instability and Asymmetric Behaviors of Okun coefficients in the Eurozone: A Markov-Switching Autoregressive Model

Purpose - This study investigates the stability over time, the disparity across countries and the asymmetry in behavior in different regimes of the relationship between unemployment and output for the Eurozone and its twelve historical members over the quarterly period 2001Q1-2017Q2. Design/Methodology/Approach - Based on a revised version of the augmented Okun's law, we use a Markov-switching autoregressive model that allows for gradual adjustment after a regime change. Findings - Results are threefold: first, there is an asymmetric and switching behavior of Okun coefficient in both cases of positive and negative changes in cyclical unemployment. Second, the Eurozone output is less sensitive to movement in cyclical unemployment in the recessionary regime than in the expansionary one. Third, most countries' outputs are systematically less sensitive to movement in cyclical unemployment when this latter is positive, than when it is negative. Research limitations/implications - This study while showing that there is no evidence of jobless recovery in the Eurozone could have been conducted to the 28 EU member states. Originality/Value: This study provides a holistic approach of Okun's law for the Eurozone and considers non-linearity of the employment-production nexus over the business cycle through the use of switching models.