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1991•RePEc: Research Papers in EconomicsRequires access

Unemployment And The GNP Gap: Okun's Law Revisited

Yu Hsing

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Abstract

This paper reexamines Okun's law by applying the Box-Cox transformation of variables. Major findings are that the effect of a change in the GNP gap on the unemployment rate varies from -0.280 in 1969.1 to -0.801 in 1982.4; the effect is larger (smaller) when the unemployment rate is higher (lower); and the linear form can be rejected at the 1 percent level. To reduce the unemployment rate by one percentage point in 1982.Q4, the author may overestimate the increase in actual real GNP by as much as $31 billion if an incorrect functional form is chosen.

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What this paper is about

This paper reexamines Okun's law by applying the Box-Cox transformation of variables. Major findings are that the effect of a change in the GNP gap on the unemployment rate varies from -0.280 in 1969.1 to -0.801 in 1982.4; the effect is larger (smaller) when the unemployment rate is higher (lower); and the linear form can be rejected at the 1 percent level. To reduce the unemployment rate by one percentage point in 1982.Q4, the author may overestimate the increase in actual real GNP by as much as $31 billion if an incorrect functional form is chosen.

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Available abstract

This paper reexamines Okun's law by applying the Box-Cox transformation of variables. Major findings are that the effect of a change in the GNP gap on the unemployment rate varies from -0.280 in 1969.1 to -0.801 in 1982.4; the effect is larger (smaller) when the unemployment rate is higher (lower); and the linear form can be rejected at the 1 percent level. To reduce the unemployment rate by one percentage point in 1982.Q4, the author may overestimate the increase in actual real GNP by as much as $31 billion if an incorrect functional form is chosen.

Key concepts: Okun's law, Unemployment, Economics, Natural rate of unemployment, Unemployment rate, Output gap, Misery index, Percentage point

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