Doubts on natural rate of unemployment: Evidence and policy implications

Abstract

This study aims to revisit the nature of unemployment dynamics in Asian and OECD countries from 1998 to 2018 by employing a novel nonlinear unit root test developed by Park and Shintani (2016). We specify a threshold autoregressive (TAR) model with two specifications to detect the presence of natural rate, hysteresis, and a permanent shift of natural rate of unemployment due to economic or structural changes. Empirical evidence is important to give guidance for policymakers to make effective stabilization policies when having doubts on the natural rate hypothesis. The findings in this study confirm the presence of hysteresis unemployment in many Asian and OECD countries while some countries are found to have a permanent shift of natural rate, thereby giving support to more activist stabilization policies.