Output and unemployment dynamics in the United States: 1950-1985

For US data over 1950-1985 the stochastic components of GNP growth and the unemployment rate appear to be stationary, and there is substantial feedback between these variables. The unconditional mean rate of unemployment in a joint model thus provides a natural benchmark in discussions of the `business cycle'. A bivariate VAR model is used to describe output-unemployment dynamics, to estimate the degree of persistence of output innovations, and to decompose output into trend and cycle. The bivariate results are interpreted using a restricted VAR and it is shown that a closely related cyclical measure can be obtained directly from the Okun's Law equation.