Okun loops and anelastic relaxation in the G7

Abstract

We show that Okun loops – loop deviations from Okun’s law – are an expected outcome of extending Okun’s law to allow for observed time dependence in the response of unemployment to a change in output, and are an example of anelastic relaxation in economics. We extend prior work on these loops by documenting their regular appearance in the United States economy since WWII and their appearance in all G7 countries. We also find that the anelastic form of Okun’s law provides a statistically significant and operationally parsimonious representation of output–unemployment dynamics in all G7 countries.