Martin Boďa, Faculty of Economics, Matej Bel University in Banská Bystrica, Slovak Republic; Faculty of Social and Economic Studies, University of Ján Evangelista Purkyňe in Ústí nad Labem, Czech Republic

Type of article: scientific article
Pages: 24 – 40

Abstract

The article responds to the issues arising from the understanding and the interpretation of Okun’s law; that is, in macroeconomics an empirically observed link between cyclical fluctuations in unemployment and product. Since Okun’s law is a simple regression relationship with both variables endogenous, it is possible to exchange the role of the regressand and the regressor in applications, but it complicates the interpretation of the key regression (i.e. Okun) coefficient. The article documents examples of an incorrect and adequate interpretation of Okun’s law, and demonstrates that upon the utilization of least squares in parameter estimation, it is not possible to switch simply from one equation unemployment v. product to another equation product v. unemployment, and that naïve procedures applied by Okun himself lead to an incorrect value of the Okun coefficient.