The validity of Okun’s law across countries, a panel data analysis

Abstract

This thesis investigates the validity of Okun’s law over long and short term period across 35 countries. The panel data consisted of annual observation for GDP and Unemployment Rates, for the years 1995-2019. The dataset was split into 3 samples, the Full sample , the EU countries and the G7 countries. Firstly, panel unit roots were used in order to examine the stationarity of the variables. Secondly, the cointegration approach was used to examine the possibility of a long term relationship. Next, the Pooled Mean Group Estimation by Pesaran (1999) was performed to estimate the long and short term coefficients. Additionally, a panel quantile regression was used to examine the short term relationship across different quantiles. Lastly, an asymmetric model was introduced and supported the possibility of a non-linear relationship between output and unemployment. Finally, the analysis supported the validity of Okun’s Law across countries.