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Okun's Law and Potential Output

Author

Listed:
  • David Lancaster

    (Reserve Bank of Australia)

  • Peter Tulip

    (Reserve Bank of Australia)

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 2\textonequarter to 3\textthreequarters per cent. This is a percentage point or two below estimates from before the mid 1990s.

Suggested Citation

  • David Lancaster & Peter Tulip, 2015. "Okun's Law and Potential Output," RBA Research Discussion Papers rdp2015-14, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2015-14
    as

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    File URL: https://www.rba.gov.au/publications/rdp/2015/pdf/rdp2015-14.pdf
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    References listed on IDEAS

    as
    1. Kiley, Michael T., 2013. "Output gaps," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 1-18.
    2. Alexander Ballantyne & Daniel De Voss & David Jacobs, 2014. "Unemployment and Spare Capacity in the Labour Market," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 7-20, September.
    3. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    4. Susanto Basu & John G. Fernald, 2009. "What do we know (and not know) about potential output?," Review, Federal Reserve Bank of St. Louis, vol. 91(Jul), pages 187-214.
    5. Åsa Johansson & Yvan Guillemette & Fabrice Murtin & David Turner & Giuseppe Nicoletti & Christine de la Maisonneuve & Philip Bagnoli & Guillaume Bousquet & Francesca Spinelli, 2013. "Long-Term Growth Scenarios," OECD Economics Department Working Papers 1000, OECD Publishing.
    6. Ms. Paula De Masi, 1997. "IMF Estimates of Potential Output: Theory and Practice," IMF Working Papers 1997/177, International Monetary Fund.
    7. Ball, Laurence & Jalles, João Tovar & Loungani, Prakash, 2015. "Do forecasters believe in Okun’s Law? An assessment of unemployment and output forecasts," International Journal of Forecasting, Elsevier, vol. 31(1), pages 176-184.
    8. Gordon de Brouwer, 1998. "Estimating Output Gaps," RBA Research Discussion Papers rdp9809, Reserve Bank of Australia.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Rachael McCririck & Daniel Rees, 2017. "The Neutral Interest Rate," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 09-18, September.

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    More about this item

    Keywords

    Okun's law; potential output; unemployment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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