Structural Breaks, Regime Change and Asymmetric Adjustment: A Short and Long Run Global Approach to the Output/Unemployment Dynamics

Even though the output and unemployment relation has always been a key theme in applied macroeconometrics research, the global hypothesis of modular short and long run dynamics assuming classic macroeconomic assumptions, is still to become a widely discussed subject in the field, and, therefore entails a large scope for further improvement, discussion and experimentation. Following recent advances in non linear bivariate estimation techniques this paper evaluates the joint hypotheses of endogenous growth, the natural rate hypothesis and asymmetric short run error correction. To tackle this global proposal a three step methodology, based on numeric grid search procedures is employed on data from nineteen OCDE countries. First, a numerical grid search is used to estimate linear trend output regimes with structural breaks and long run natural Unemployment rate regimes are endogenously obtained from these estimates. Finally, different grid search procedures, based on the original two step procedure for estimating linear cointegration models, are used to estimate the short run adjustment process assuming threshold vector error correction dynamics, following recent proposals on asymmetric Okun adjustment.