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Empirical Analysis of the Phillips Curve and Okun’s Law Through Simultaneous Equation Modeling: A Case Study of Pakistan

Author

Listed:
  • Muhammad Umer
  • Mukhtar Danladi
  • Babar Nawaz

Abstract

According to the Phillips curve, there is an inverse relationship between inflation and unemployment. According to the Okun’s law, there is an inverse relationship between potential output growth and unemployment. The paper tries to check whether these interdependencies are seen in the Pakistan’s economy, thus testing the relevance of both dependencies for that economy. With this aim, the authors analyse the relationships between several macroeconomic variables, such as inflation rate, unemployment rate, GDP per capita growth rate, and population growth rate, using annual data of the period 1985–2017. By employing the respective simultaneous equation models (SEM) estimated with the indirect least square technique (ILS) and using various statistical tests, the authors conclude that the relationship postulated by the Phillips curve can be observed in the Pakistan’s economy, but the results of the examination do not confirm the occurrence of the relationship postulated by the Okun’s law.

Suggested Citation

  • Muhammad Umer & Mukhtar Danladi & Babar Nawaz, 2021. "Empirical Analysis of the Phillips Curve and Okun’s Law Through Simultaneous Equation Modeling: A Case Study of Pakistan," Ekonomista, Polskie Towarzystwo Ekonomiczne, issue 3, pages 418-439.
    • Handle: RePEc:aoq:ekonom:y:2021:i:3:p:418-439
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    References listed on IDEAS

    as
    1. Hamid Mahmood & Abdul Waheed & Samia Khalid, 2017. "The impact of monetary strategies on economic growth: an empirical analysis for Pakistan," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 7(10), pages 260-268, October.
    2. Hamid Mahmood & Abdul Waheed & Samia Khalid, 2017. "The Impact of Monetary Strategies on Economic Growth: An Empirical Analysis for Pakistan," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 7(10), pages 260-268.
    3. Farzana Shaheen & Azad Haider & Sajid Amin Javed, 2011. "Estimating Pakistan's Time Varying Non-Accelerating Inflation Rate of Unemployment: An Unobserved Component Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 1(4), pages 172-179.
    4. Waqqas Qayyum, 2007. "Causes of Youth Unemployment in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 46(4), pages 611-621.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Phillips curve; Okun’s law; simultaneous equations models; indirect least square technique; Pakistan;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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