Time variation in Okun’s law in Sweden

ABSTRACT

In this article we estimate an Okun’s law relationship for Sweden using a model with time-varying parameters. Employing quarterly data from 1982 to 2014, results indicate that the GDP growth needed to keep the unemployment rate unchanged in the long rung has fallen considerably over the last 10 years.

KEYWORDS:

• Unemployment
• GDP growth
• time-varying parameters
• constant gain least squares

JEL CLASSIFICATION:

• E24
• C22

Acknowledgement

I am grateful to two anonymous referees for valuable comments.

Notes

¹ The term ‘Okun’s law’ does not have a unique interpretation. It can also be used to describe a relationship in levels between the unemployment rate and GDP; see, for example, Okun (1962), Owyang and Sekhposyan (2012) and Ball, Leigh, and Loungani (2013).

² To some extent, this debate has been fuelled by the behaviour of labour markets in many different countries during and following the global financial crisis. For example, in the United States, the unemployment rate has fallen considerably over the last few years, despite moderate GDP growth.

³ See, for example, Lee (2000), Sögner (2001) and Sögner and Stiassny (2002) for earlier contributions.

⁴ This model appears reasonably well specified. For example, it appears to have no residual autocorrelation. As will be seen below though, it is not perfect as it, for example, fails tests for parameter stability.

⁵ It can be noted that neither nor contain a unit root. Conducting an Augmented Dickey–Fuller test on the two variables yields the test statistics −3.75 and −4.18, respectively, both of which are significant at the 1% level.

⁶ This can be contrasted with OLS where the same weight is assigned to all observations of the sample.

⁷ See, for example, Orphanides and Williams (2004), Branch and Evans (2006), Dale, Orphanides, and Österholm (2011) and Antipin, Boumediene, and Österholm (2014).

⁸ The crisis was both financial and real. For example, the bank formerly known as Nordbanken (now Nordea) had to be saved by the government, the fixed exchange rate was abandoned and GDP fell in 1991–1993.