Okun’S Law In Malaysia: An Autoregressive Distributed Lag (Ardl) Approach With Hodrick-Prescott (Hp) Filter
Okun’s Law has present in most of the European countries. It explained the negative relationship between output growth and unemployment rate. It has been a norm for the existence of the negative relationship between output growth and unemployment. The impact of high unemployment rate is direct, right after the recession or the decrease of output growth. It is therefore important to discover the effect of the relationship because from there, we will be able to effectively determine the suitable policy. This paper tends to examine the existence of Okun’s relationship in terms of Malaysia context using a rather new econometric approach. The relationship is measured by applying the first difference and gap model with Hodrick-Prescott filter (HP filter), furthered with Autogressive Distributed Lag (ARDL) to determine the co-integration between the variables and their causality. The main reason of applying ARDL is because of the small sample of data and it’s applicability on the order of integration, which is regardless even if the regressors are stationary. Additional to that, the method enables us to find the relationship between unemployment and output without determining the natural rate of output nor natural rate of unemployment
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