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Is Okun’s Law Valid in Bangladesh? A Time Series Analysis

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  • Arfanul Ibna Mustafa Sakib

Abstract

Using the data from 1991 to 2019, this study attempts to verify Okun’s law by utilizing both ‘The difference and the dynamic versions’ of Okun’s law in Bangladesh and tries to find the value of Okun’s coefficient. The autoregressive-distribution lag (ARDL) bounds test is applied to determine the existence of a long-term relationship between the variables, and then the ordinary least squares (OLS) approach is used to estimate the findings. The findings show that Okun’s coefficient is –0.058 for the difference version of Okun’s law, which is statistically insignificant. In addition, for the dynamic version of Okun’s law, findings show that the effect of the ‘immediate past economic growth rate’ on ‘current change in the unemployment rate’ is 0.15, and it is statistically insignificant too. However, the effect of the ‘current economic growth rate’ on ‘current change in the unemployment rate’ is –0.22, and it is statistically significant at 10% significance level. In both versions of Okun’s law, R 2 values, F -statistic and cumulative sum of squares show the instability of the models. Due to statistically insignificant coefficients and model instability, it can be concluded that Okun’s law is invalid in Bangladesh. JEL Codes: E24, C22, B23, C87

Suggested Citation

  • Arfanul Ibna Mustafa Sakib, 2023. "Is Okun’s Law Valid in Bangladesh? A Time Series Analysis," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 24(2), pages 137-152, September.
    • Handle: RePEc:sae:soueco:v:24:y:2023:i:2:p:137-152
    DOI: 10.1177/13915614231198283
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    References listed on IDEAS

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    1. Mohammed Ershad Hussain & Mahfuzul Haque, 2016. "Foreign Direct Investment, Trade, and Economic Growth: An Empirical Analysis of Bangladesh," Economies, MDPI, vol. 4(2), pages 1-14, April.
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    3. Sikiru Jimoh BABALOLA & Jimoh Olakunle SAKA & Idris Abiodun ADENUGA, 2013. "The Validity of Okun’s Law in Nigeria: A Difference Model Approach," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(12), pages 1598-1608, December.
    4. Farah Arif, 2020. "The Validity of Okun’s Coefficient in Pakistan: A Time Series Analysis," Post-Print hal-05299340, HAL.
    5. Laurence Ball & Davide Furceri & Daniel Leigh & Prakash Loungani, 2019. "Does One Law Fit All? Cross-Country Evidence on Okun’s Law," Open Economies Review, Springer, vol. 30(5), pages 841-874, November.
    6. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
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    Cited by:

    1. Abdisalan Aden Mohamed, 2024. "Economic growth and unemployment nexus: empirical test of Okun’s law in Somalia," Journal of Economic Structures, Springer;Pan-Pacific Association of Input-Output Studies (PAPAIOS), vol. 13(1), pages 1-12, December.

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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • C87 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Econometric Software

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