Okun's Law
There Are Two Okun's Law Relationships Between Output and Unemployment
Humberto Barreto and Frank Howland*
Wabash College
Abstract
This paper corrects a fundamental error in the literature examining the Okun's Law relationship between the unemployment rate and the rate of growth of output. Since Okun's original work, biased estimates of the Okun Coefficient on Unemployment, output gaps, and potential GNP have been reported by authors who mistakenly assume that unbiased coefficient estimates of the reverse regression are reciprocals of their direct regression analogues. Thus, for example, there is no need to explore a wide variety of alternative answers to the "puzzle" of an extremely high Okun coefficient in Japan - the extremely large value is merely a statistical artifact.
(JEL Classification Numbers: C1, E3, E6)
1993
Address correspondence to
Humberto Barreto, Wabash College, Crawfordsville, IN 47933 USA
FAX: (317) 364-4295
E-mail: barretoh@wabash.edu
barretoh@wabash.edu
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