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Do real-time Okun's law errors predict GDP data revisions?

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  • Michelle L. Barnes
  • Fabià Gumbau-Brisa
  • Giovanni P. Olivei

Abstract

Using U.S. real-time data, we show that changes in the unemployment rate unexplained by Okun's Law have significant predictive power for GDP data revisions. A positive (negative) error in Okun's Law in real time implies that GDP will be later revised to show less (more) growth than initially estimated by the statistical agency. The information in Okun's Law errors about the true state of real economic activity also helps to improve GDP forecasts in the near term. Our findings add a new dimension to the interpretation of real-time Okun's Law errors, as they show that these errors can convey information other than a change in potential GDP, the equilibrium unemployment rate, or the use of labor's intensive margin.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 13-3.

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Date of creation: 2013
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Handle: RePEc:fip:fedbwp:13-3

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Related research

Keywords: Unemployment ; Gross domestic product;

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  1. Adam, Klaus & Padula, Mario, 2003. "Inflation dynamics and subjective expectations in the United States," Working Paper Series 0222, European Central Bank.
  2. Owyang, Michael T. & Sekhposyan, Tatevik, 2012. "Okun’s law over the business cycle: was the great recession all that different?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 399-418.
  3. Edward S. Knotek & II, 2007. "How useful is Okun's law?," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 73-103.
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