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Okun's law in panels of countries and states

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  • Ho-Chuan (River) Huang
  • Chih-Chuan Yeh

Abstract

This article contributes to the empirical literature of Okun's law in three respects. First, in contrast to the limited data used in the existing studies, we employ two extensive (across countries and across states, i.e. within a country) panel data sets to investigate the validity of Okun's law. Second, the use of the Pooled Mean Group (PMG) estimator permits us not to pre-filter the data as often done in the current literature, and can take into account the possibility of cointegration between unemployment and output. Third, in addition to the short-run relationship or cyclical components between unemployment and output, we also estimate the long-run linkage between these two important variables. Empirical results show that unemployment and output are long-run cointegrated, irrespective of using country- or state-level data. Moreover, the unemployment-output linkages are found to be negative and highly significant both in the short- and long-run. Our results not only confirm the validity of Okun's law (in the short-run) but also point out that a similar tradeoff exists in the long run.

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File URL: http://hdl.handle.net/10.1080/00036846.2011.597725
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 45 (2013)
Issue (Month): 2 (January)
Pages: 191-199

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Handle: RePEc:taf:applec:45:y:2013:i:2:p:191-199

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Cited by:
  1. KARGI, Bilal, 2013. "Okun’s Law and Long Term Co-Integration Analysis for OECD Countries (1987-2012)," MPRA Paper 55700, University Library of Munich, Germany.
  2. Ryan W Herzog, 2013. "An Analysis of Okun's Law, the Natural Rate, and Voting Preferences for the 50 States," Economics Bulletin, AccessEcon, vol. 33(4), pages 2504-2517.

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