TESTING THE UNEMPLOYMENT HYSTERESIS IN G7 COUNTRIES: A FRESH EVIDENCE FROM FOURIER THRESHOLD UNIT ROOT TEST

Abstract

In this study, we test the validity of unemployment hysteresis in G7 countries over the period of 1991 - 2019 using monthly data by suggesting a new unit root test that considers both structural breaks and nonlinearity that we entitled as Fourier Threshold Unit Root (FTUR) test. The results of the test show that unemployment rates of Canada, Japan, and the USA are nonlinear. Thus, for these countries we apply the FTUR test, while for the remaining series, we employ the Fourier ADF unit root test. The results of unit root tests show that unemployment hysteresis holds in Canada, France, and the United Kingdom, while Non -Accelerating Inflation Rate of Unemployment applies in Germany, and Italy. We could not reject the null of a unit root for Japan and the USA only in the second regime, where the unemployment series are rising. So, we conclude that the policymakers of Japan and the USA should follow fiscal stabilization policies only in recession periods.