Testing the Stability of Okuns Law Term Paper Example | Topics and Well Written Essays - 2250 words

Testing the Stability of Okuns Law - Term Paper Example However, this inverse relationship was not replicated in the year that followed. In other words, while average growth in real Gross Domestic Product slowed down in the year that followed, the downward trend in the unemployment rate continued. Many economists could easily view this situation as an anomaly. Given the importance of economic growth and job creation to both policy makers and the citizenry, it is important to study the relationship between the two in order to ensure a more effective and efficient decision-making. Okun (1962) made the first attempt to study this relationship and he found that real GDP and unemployment are inversely related to each other and this has come to be known as the Okun’s Law. More specifically, a 2% rise in output is associated with a 1% decline in the unemployment rate. In another version, a 3% rise in the Gross National Product is associated with a 1% decline in the unemployment rate. While the relationship determined by Okun appears to have some empirical deficiencies, it, nonetheless, serves as a guide to policymakers in making crucial economic decisions. This paper seeks to determine whether or not there is some variability in the relationship between changes in real GDP growth rate and changes in the unemployment rate over an extended period. It is done by means of a recursive Ordinary Least Squares or rolling regression techniques.