Okun's Law and Potential Output
Reserve Bank of Australia Research Discussion Paper No. 2015-14
39 Pages Posted: 11 Dec 2015
Date Written: December 7, 2015
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: Suggested Citation