Testing for asymmetry in Okun's law: A cross-country comparison

Most specifications of Okun's law assume a symmetric relationship between changes in unemployment and real output. We test this assumption for seven OECD countries (Australia, Canada, Germany, Japan, New Zealand, the United Kingdom and the United States). We find that failure to take account of asymmetries would see a rejection of the hypothesis that there exists a long-run relationship between unemployment and output in countries such as the United States and New Zealand. We also find that short-run output and unemployment adjustments to disequilibrium usually differ according to whether up-turns or down-turns in the business cycle are considered. These results could not have been obtained using standard estimates of Okun''s law based on a symmetric approach.