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Regional Growth and Unemployment: The Validity of Okun's Law for the Finnish Regions

Listed author(s):
  • Aki Kangasharju
  • Christophe Tavera
  • Peter Nijkamp

This paper offers a concise critical overview of Okun's Law, with particular attention for its relevance in open economic systems of regions. Based on an extensive set of economic data for Finnish regions, the existence of cointegration is tested using alternative statistical methods, viz. the residual-based test and the conditional error correction model. A novelty of the paper is to combine a method of hidden cointegrations with a method of removing cross-sectional dependence. After correcting for hidden cointegrations and cross-sectional dependence, both statistical methods used yield almost similar results and confirm the presence of cointegration for the relevant data on Finnish regions. The long-run Okun relationship for regions in Finland appears to confirm results found elsewhere in the literature on countries as a whole, although the coefficients tend to be smaller. RÉSUMÉ Cette communication présente un aperçu critique concis de la loi d'Okun, et se penche tout particulièrement sur sa pertinence éventuelle pour les systèmes économiques ouverts dans les régions. Sur la base d'un ensemble de données économiques approfondies concernant les régions finnoises, on procède à des essais de l'existence d'une co-intégration, en appliquant des méthodes statistiques alternatives, à savoir les essais à base résiduelle et le modèle de correction des erreurs conditionnelles. Une nouveauté contenue dans cette communication est la combinaison d'une méthode de co-intégrations cachées avec une méthode d’élimination de la dépendance transversale. Après des corrections tenant compte des co-intégrations cachées et de la dépendance transversale, les deux méthodes statistiques utilisées produisent des résultats similaires, et confirment la présence d'une co-intégration pour les données relatives aux régions finnoises. Les rapports de longue durée de la loi d'Okun appliquée aux régions de la Finlande semblent confirmer les résultats relevés ailleurs dans la documentation générale sur les pays, même si les coefficients ont tendance à être plus petits. EXTRACTO Este estudio ofrece una perspectiva general concisa y crítica de la ley de Okun, prestando particular atención a su relevancia en sistemas económicos abiertos regionales. En base a un conjunto amplio de datos económicos sobre regiones finlandesas, se pone a prueba la existencia de cointegración utilizando métodos estadísticos alternativos, tales como, el ensayo basado en residuales y el modelo condicional de corrección de errores. Una de las novedades del estudio es que combina un método de cointegraciones ocultas con un método de eliminación de dependencia cruzada. Después de hacer correcciones para las cointegraciones ocultas y la dependencia cruzada, ambos métodos estadísticos producen resultados casi similares y confirman la presencia de cointegración en los datos oportunos sobre regiones finlandesas. La relación Okun a largo plazo de regiones en Finlandia parece confirmar los resultados encontrados en otras partes de la bibliografía sobre países enteros, aunque los coeficientes tienden a ser menores.

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Article provided by Taylor & Francis Journals in its journal Spatial Economic Analysis.

Volume (Year): 7 (2012)
Issue (Month): 3 (September)
Pages: 381-395

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Handle: RePEc:taf:specan:v:7:y:2012:i:3:p:381-395
DOI: 10.1080/17421772.2012.694141
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  1. Robert J. Gordon, 1984. "Unemployment and Potential Output in the 1980s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 537-568.
  2. Kwami Adanu, 2005. "A cross-province comparison of Okun's coefficient for Canada," Applied Economics, Taylor & Francis Journals, vol. 37(5), pages 561-570.
  3. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(03), pages 597-625, June.
  4. Granger, Clive W.J. & YOON, GAWON, 2002. "Hidden Cointegration," University of California at San Diego, Economics Working Paper Series qt9qn5f61j, Department of Economics, UC San Diego.
  5. Dimitris Christopoulos, 2004. "The relationship between output and unemployment: Evidence from Greek regions," Economics of Governance, Springer, vol. 83(3), pages 611-620, July.
  6. David Mayes & Matti Viren, 2002. "Asymmetry and the Problem of Aggregation in the Euro Area," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 29(1), pages 47-73, March.
  7. Lee, Jim, 2000. "The Robustness of Okun's Law: Evidence from OECD Countries," Journal of Macroeconomics, Elsevier, vol. 22(2), pages 331-356, April.
  8. Brian Silverstone & Richard Harris, 2001. "Testing for asymmetry in Okun's law: A cross-country comparison," Economics Bulletin, AccessEcon, vol. 5(2), pages 1-13.
  9. Attfield, Clifford L. F. & Silverstone, Brian, 1998. "Okun's Law, Cointegration and Gap Variables," Journal of Macroeconomics, Elsevier, vol. 20(3), pages 625-637, July.
  10. Imad A. Moosa, 1997. "On the Costs of Inflation and Unemployment," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 19(4), pages 651-666, July.
  11. Freeman, Donald G, 2001. "Panel Tests of Okun's Law for Ten Industrial Countries," Economic Inquiry, Western Economic Association International, vol. 39(4), pages 511-523, October.
  12. Paramsothy Silvapulle & Imad Moosa & Mervyn Silvapulle, 2004. "Asymmetry in Okun's law," Canadian Journal of Economics, Canadian Economics Association, vol. 37(2), pages 353-374, May.
  13. Mary C. Daly & Bart Hobijn, 2010. "Okun’s law and the unemployment surprise of 2009," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar8.
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