Okun's Law and Potential Output

Reserve Bank of Australia Research Discussion Paper No. 2015-14

39 Pages Posted: 11 Dec 2015

See all articles by David P. Lancaster

David P. Lancaster

Reserve Bank of Australia

Peter Tulip

Reserve Bank of Australia

Date Written: December 7, 2015

Abstract

We find that Okun's law provides a simple and accurate means of understanding and predicting changes in the unemployment rate in Australia. Okun's law also implies a rate of output growth consistent with stable unemployment, called the growth of potential output. Our estimates of potential output growth are imprecise and fluctuate over time. A recent estimate is a bit below 3 per cent a year, with a +/− one standard error band covering the range 2¼ to 3¾ per cent. This is a percentage point or two below estimates from before the mid 1990s.

Keywords: Okun’s law, potential output, unemployment

JEL Classification: E24, E27, J64

Suggested Citation

Lancaster, David Paul and Tulip, Peter, Okun's Law and Potential Output (December 7, 2015). Reserve Bank of Australia Research Discussion Paper No. 2015-14. Available at SSRN: https://ssrn.com/abstract=2701073 or http://dx.doi.org/10.2139/ssrn.2701073

David Paul Lancaster

Reserve Bank of Australia ( email )

65, Martin Place
Sydney, NSW 2000
Australia

Peter Tulip (Contact Author)

Reserve Bank of Australia ( email )

GPO Box 3947
Sydney, NSW 2001
Australia
61-2-9551-8831 (Phone)

HOME PAGE: http://www.petertulip.com

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