Regime-dependent Okun coefficients in Chile

According to an extensive body of literature, the unemployment rate has an asymmetric dynamic, rising rapidly in recessions and falling gradually in expansions. However, there is not much evidence on developing countries, especially those in Latin America. Therefore, this study proposes a threshold model and a Markov- switching model to examine regime-dependent Okun coefficients using quarterly data from Chile for the period 1996:1–2019:4 disaggregated by sex. Both approaches are nonlinear versions of the gap model of Okun's law, which implies not having to deal with stationarity or cointegration tests. Nonetheless, they represent the challenge of how the natural rate of unemployment and potential output should be estimated, which is a huge question in macroeconomics. Thus, the analysis covers three relevant dimensions: (1) the estimating trends of macroeconomic variables; (2) the model that best fits the relationship between the variables; and (3) the dynamics of unemployment in Chile across business cycle regimes. According to the Markov- switching model estimates, the Kalman filter outperforms univariate filters in capturing the cyclical components relevant to regime-dependent Okun coefficients. This methodological insight contributes to the existing literature by emphasising the significance of multivariate filtering techniques in elucidating the intricacies of the relationship between unemployment and output. Furthermore, the Markov-switching estimates reveal significant asymmetries and a gender gap in unemployment responses to economic conditions. Unemployment behaves asymmetrically across the business cycle, responding more strongly to economic downswings than upswings. Further, the gender-specific results indicate that female unemployment is more sensitive to economic downturns than male unemployment, but less responsive during recoveries. The findings suggest that aggregate demand management policies may not suffice to restore employment levels post-recession, particularly for female workers. Thus, structural reforms addressing labour market rigidities and enhancing female labour participation might be necessary.