Asymmetry in the Okun Coefficient in Romanian Economy

The current financial and economic crisis reignited the interest in the output-unemployment relationship. The unemployment rate in Romanian economy reacted strongly to the fall in economic activity, by more than doubling in less than a year raising, and thus raising questions on the validity of a symmetric relationship between unemployment and output. In this paper I investigate the existence of asymmetries in the Okun coefficient in Romanian economy. The asymmetric approach is justified based on both practical reasons, given the last results in the literature, as well as from a theoretic point of view. The econometric framework used is the Markov Switching approach. The data used is at monthly frequency and consists in the monthly industrial production index and in the unemployment rate between January 1991 and December 2009. The Regime switching approach allows for the testing whether the Okun relation switches between different phases. I find that there are asymmetries in the Okun coefficient. A state characterized by a weaker Okun coefficient of -0.09 was found, and a state with a stronger Okun coefficient of -0.32. After 1999, the switches are associated with the two phases of the business cycles, with a weaker Okun coefficient during the expansion and a stronger Okun relationship during the recession, as in the literature, underlining that the Romanian economy became a full market economy. The findings here reconcile the previous findings based on symmetric approaches. Some policy implications as well as the peril of a jobless recovery are discussed. This paper thus contributes to the ongoing refinement and understanding of the output - unemployment relationship.