Okun’s law – verification using a VAR panel model for Polish voivodeships
DOI:
https://doi.org/10.15584/nsawg.2023.2.4Keywords:
unemployment, economic growth, regional analysis, PVARAbstract
The aim of the article is to present the results of the author’s own research on the relation known in economics as ‘Okun’s law’. A data panel for 16 Polish voivodeships in the years 1995–2019 was used. A panel vector autoregression (PVAR) model was used as a research tool, which captured, for example, the dynamic nature of the modelled relationship. The generalised method of moments (GMM) was used to estimate the parameters of the model. Then, the orthogonal impulse response functions (IRF) were estimated using the Cholesky decomposition. The decomposition of forecast error in the 10-year horizon was also presented.
Okun’s law assumes a negative relationship between changes in the unemployment rate and the rate of real economic growth. It was originally observed empirically by A. Okun in 1962. The original exchange coefficient was approx. 0.3. This means that each additional percentage of GNP is associated with a decrease in the unemployment rate by approx. 0.3 p.p. The estimates of the impulse response functions presented in the article show the statistical significance of the impact of shocks coming from individual variables. A positive impulse coming from the real GDP growth rate resulted in a decrease in the change of the unemployment rate (and vice versa) compared to the base path. A relatively slow decay of shocks in the model can also be observed. Decomposition of the forecast error shows that approx. 31% of the variability of the changes of the unemployment rate can be explained by the real GDP growth rate. In turn, changes in the unemployment rate are able to explain only about 6% of future rates of real economic growth.
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