An empirical test for Okun’s law using a smooth time-varying parameter approach: evidence from East Asian countries

Abstract

This article investigates Okun’s law for Japan, Korea, Hong Kong and Singapore over the period 1986–2011. Two time-varying parameter models, first-order difference and gap models, are considered to find a negative time-varying relationship between the real output and the unemployment rate. The empirical findings show that there exist time-varying negative relationships between the real output and the unemployment rate for all economies. We also find that the estimated time-varying Okun’s coefficients are dominated by changes in the real GDP for Korea. However, the Okun’s coefficients are dominated by changes in the unemployment rate for Japan, Hong Kong and Singapore.

Keywords:

• Okun’s law
• time-varying parameter model
• sieve method

JEL Classification:

• C22
• E24
• E32

Notes

¹ The first four Legendre polynomials are written by , , , and .

² The Johnson’s distribution can capture skewed and leptokurtic behaviour of a random variable. See Choi and Nam (2008) for more details.

³ The code and data used in this article are available upon request.