TESTING OKUN’S LAW: A CONTEMPORARARY STUDY OF SOUTH-ASIA

Abstract

The purpose of this paper is to test Okun’s law for four South-Asian Countries i.e., Pakistan, India, Bangladesh, and Sri-Lanka, by using panel data analysis for the period of 2010-2020. A famous Levin, Lin & Chu method has been used to check the stationarity of the panel data, the unit root test highlights export is stationarity at level and CPI, GDP and unemployment are stationarity at first difference. Moreover, Fixed effect method, Hausman Test, Wald test, Johansen Cointegration Test, Breusch-Pagan-Godfrey, and RAMSEY RESET TEST, has been used respectively. The estimated result highlights that there is negative relationship between economic growth and unemployment rate in these countries. In other word a 1% increase in GDP growth rate decreases the unemployment rate in these countries by 1.599199% and it is highly significant i.e., p-value = 0.0056, which verifies that these four countries obey Okun’s law and there is cointegration among these variables. Furthermore, the result shows that there is a positive relationship between inflation rate and economic growth, which is significant. However, the result highlights that there is a positive relationship between export and economic growth, but it is insignificant. Therefore, it is proved that economic growth is very crucial for these South-Asian countries to dismantle unemployment, so the policy makers can target economic growth by determining the most important determinant of GDP to enhance GDP growth.