TESTING THE VALIDITY OF OKUN’S LAW WITH MIXED-FREQUENCY DATA: THE CASE OF TÜRKIYE

Okun’s law posits a one-way relationship running from gross domestic product (GDP) to the unemployment rate. According to this law, an increase in GDP beyond its potential level will result in a decrease in the unemployment rate. In practice, potential real GDP is often taken to be the trend GDP, and the difference between actual GDP and potential GDP is termed the real GDP gap. The empirical literature typically estimates potential GDP using a linear trend approach. However, employing a linear trend to estimate potential GDP assumes that these values remain constant over the period under consideration. However, in reality, there are many reasons why potential GDP cannot remain constant over time, but rather can change. In such cases, using a Kalman filter approach instead of a simple linear trend is more appropriate. Furthermore, because the unemployment rate is measured at a higher frequency than GDP, unemployment data are typically not used at their original frequency in empirical analyses. In this study, the validity of Okun’s law is tested by utilizing the unemployment rate at its original frequency for the Turkish economy. By employing a restricted reverse MIDAS (RR-MIDAS) model in our analysis, we find that Okun’s law holds for the Turkish economy over the period examined.