Wong Chin Yoong, for being very helpful and guiding us during the preparation of this research project. Without her help, we will not be able to submit the paperwork required for the research project. Model 9……….104 Appendix 4.74: Autocorrelation Breusch-Godfrey Serial Correlation LM Test for Model Appendix 4.75: Autocorrelation Breusch-Godfrey Serial Correlation LM Test for .
By doing this, we hope to better understand the effect of QE on the Okun's Law multiplier and thus have a clearer picture of how QE affects the unemployment rate. This paper investigates the impact of quantitative easing on Okun's law in the United States using an ordinary least square (OLS) model with quarterly time series data from 1985 to 2015. We find that the Okun's law multiplier does not decrease after the 1990s, but declines every time , when the economy is in recession.
INTRODUCTION
- Introduction
- Research Background
- Okun’s Law and Unemployment in United States (U.S.)
- The Arrival of 2008 Subprime Mortgage Crisis
- Quantitative Easing (QE) the Unconventional Monetary Policy
- Unemployment after Quantitative Easing (QE)
- Problem Statement
- Research Objectives
- General Objective
- Specific Objectives
- Research Questions
- Hypotheses of the Study
- Does Okun’s Law multiplier decrease after 1990s?
- Does Okun’s Law multiplier decrease after 2000s?
- Effect of Financial Crisis on Okun’s Law
- Effect of Quantitative Easing (QE) on Okun’s Law (TS)
- Effect of Quantitative Easing (QE) on Okun’s Law (LNRB) (LNRB)
- How Quantitative Easing (QE) influence the role of financial crisis on Okun’s Law financial crisis on Okun’s Law
- How Government Deficit Spending (GDS) influences the role of Quantitative Easing (QE) on Okun’s Law the role of Quantitative Easing (QE) on Okun’s Law
- How INFEXP influence the role of Quantitative Easing (QE) on Okun’s Law (QE) on Okun’s Law
- Significance of Study
- Chapter Layout
- Chapter 1: Research Overview
- Chapter 2: Literature Review
- Chapter 3: Methodology
- Chapter 4: Data Analysis
- Chapter 5: Discussion, Conclusion, and Implications
- Conclusion
In addition, there is no study on the relationship between QE and Okun's law. The construction of our model in this study is to determine the impact of QE on unemployment in the US economy through the adoption of Okun's law. In this paper, our objective is to investigate the effectiveness of QE on the recovery of the unemployment rate in the United States using quarterly time series data from 1985 to 2015 by implementing the Okun's Law equation.
H0: There is no effect of QE affecting the role of financial crisis on Okun's law. Researchers should study how other variables affect QE on Okun's law to gain more understanding about the macroeconomic impact of QE. This provides a clearer picture of QE and Okun's law and further explanation about QE and Okun's law will be shown in this chapter.
LITERATURE REVIEW
- Introduction
- Effectiveness of Unconventional Monetary Policy
- Quantitative Easing (QE) and Unemployment
- Other Studies Regarding Quantitative Easing
- Okun’s Law: Unemployment and Output Gap
- Conclusion
In the study of Egypt, Okun's law was interpreted in a certain way if GDP grows at 3%. Okun's law suggested an inverse relationship between cyclical fluctuations in the output gap and the unemployment gap (Elshamy, 2013). Elshamy (2013) argued that there is a long-term relationship between GDP growth and unemployment, which is similar to Okun's findings.
Furthermore, Okun's law also exists in Malaysia, which explains that any effort to reduce unemployment will result in an increase in output growth. Moreover, Villaverde and Maza (2009) studied Okun's law in Spanish and showed that there is an inverse relationship between unemployment rate and output growth. Prachowny (1993) believes that Okun's law provides only a partial measure of the relationship between output growth and the unemployment rate.
DATA AND METHODOLOGY
- Introduction
- Theoretical Framework
- Theoretical Framework: Okun's Law
- Empirical Framework
- Discussion of Quantitative Easing (QE) Variables
- Data Source
- Data Processing
- Empirical Methodology
- Descriptive Statistics
- Unit Root Test
- Johansen and Juselius (JJ) Cointegration Test
- Ordinary Least Square (OLS)
- Diagnostic Checking
- Conclusion
Therefore, we use unemployment as a dependent variable to observe whether QE is useful in making unemployment fall after the impact of the crisis. If there is a large number of people who are unemployed, this will have serious consequences for the growth of a country's overall economy if we do not address it in time. The signs of the original Okun's Law multiplier and also the Okun's Law multiplier after the 1990s, 2000s, and during the financial crisis are expected to be negative because of Okun's Law's negative relationship between unemployment and the output gap.
According to Joyce et al. 2012), Japan was the first country to use QE to deal with the downturn in the real estate market and the pressures of deflation in Japan. The purchases by the Federal Reserve were estimated to help restore liquidity to the economy and narrow the interest rate spread at agencies. The time series analysis method is to study the observations at different times, where the collected data are serially autocorrelated.
The next section will show the descriptive statistics, diagnostic checking and the cointegration test of the models. If it does, it violates the assumption of the classical ordinary least squares (OLS) regression model that there is no exact collinearity between the independent variables. When R2 is high, we know that the two specific independent variables are quite correlated, F test is significant. iv) High sensitivity of the OLS estimators and the standard errors to even a small change in the data.
One of the assumptions underlying the classical normal linear regression model (CNLRM) is a constant variance of the error term independent of i, µi, which is known as homoscedasticity. In contrast, heteroskedasticity occurs when the variance of the error is non-constant, where the variance of the error term depends on the observation in question. Therefore, the variances and standard errors of the estimated coefficients are not properly measured, so they are.
Impure autocorrelation exists due to model specification error, such as missing important variables or incorrect functional form.
DATA ANALYSIS
- Introduction
- Descriptive Analysis
- Unit Root Test
- Augmented Dickey-Fuller (ADF) Test
- Phillips Perron (PP) Test
- Johansen-Juselius (JJ) Cointegration Test
- Quantitative Easing (QE) and Okun’s Law in United States: Baseline Models States: Baseline Models
- Diagnostic Checking
- Multicollinearity
- Heteroscedasticity
- Autocorrelation (Breusch-Godfrey Serial Correlation LM Test) LM Test)
- Normality Test: Jarque-Bera Test
- Model Specification Test: Ramsey RESET Test
- Quantitative Easing (QE) and Okun’s Law in United States: Interactive Models States: Interactive Models
- Does Okun’s Law Multiplier Decreases After 1990’s?
- Does Financial Crisis Affects Okun’s Law Multiplier?
- Quantitative Easing (QE) and Okun’s Law: Under normal economy condition normal economy condition
- How Quantitative Easing (QE) Influence the Impact of Financial Crisis on Okun’s Law? Financial Crisis on Okun’s Law?
- How Government Deficit Spending and Inflation Expectations Influence the Impact of Quantitative Easing Expectations Influence the Impact of Quantitative Easing
- Optimal Amount of Quantitative Easing ( QE) needed to bring back pre-crisis Okun’s Law Multiplier
- Conclusion
Therefore, in this session we first use interaction terms to estimate Okun's Law multiplier after 1990s and during financial crisis using ordinary least square (OLS) method. We then further develop our model using interaction terms to examine the effect of QE, GDS, and INFEXP on Okun's_Law. Referring back to our original Okun's Law multiplier in Model 1 from Table 4.5, which is -0.7617, we note that the Okun's Law multiplier actually remains almost the same as the original Okun's Law multiplier after the 1990s.
This indicates that whether before or after the 1990s, given the Okun's Law multiplier, the recovery in employment should remain the same when the economy is out of recession. Since the Okun's Law multiplier remains the same even after the 1990s, why is unemployment still slow to recover even when the economy recovers. Given that the Okun's Law multiplier does not decline after the 1990s, why is the unemployment rate still high even as output recovers.
We then found that under the influence of financial crisis, the Okun's Law multiplier is -0.5871. A lower Okun's Law multiplier therefore implies that employment recovery will be slower when the economy experiences a recession. Therefore, we concluded that when the economy is not experiencing a financial crisis, QE has no impact on Okun's law multiplier.
From our findings, we observed that QE is insignificant according to Okun's law when the economy is doing well, but what if the economy is in a financial crisis. Since the financial crisis will cause the unemployment rate to rise, so if QE is effective, we expect the negative sign to offset the positive impact of the financial crisis on Okun's law. From Table 4.7, Model 1 shows that QE successfully returns a negative Okun's Law relationship.
From Table 4.7, Model 5 and Model 6 suggest that inflation expectations can increase the negative effect of the original Okun's Law.
DISCUSSION, CONCLUSION AND IMPLICATIONS IMPLICATIONS
Introduction
Discussion of Major Findings
Thus, we observed that the key to answering this question is to consider the effect of the financial crisis on Okun's law, which brings us to the second question. When the effect of the financial crisis is taken into account, the Okun's Law multiplier decreases, suggesting that the recovery of employment will be slower whenever the economy experiences a recession compared to when the economy is not in a financial crisis. Therefore, this explains the slow recovery of employment during an economic downturn despite increased output, so the phenomenon of unemployment recovery is justified.
Yes, QE is effective in bringing back negative Okun's Law relationship in the midst of financial crisis. Nevertheless, when the economy is in a financial crisis, QE is able to offset the negative impact of financial crisis by restoring the negative impact of Okun's law and thus accelerates job recovery for every increase in output. Therefore, this means that despite QE being an unconventional monetary policy, but by looking at how QE affects the Okun's Law relationship, we found that QE is actually efficient and very effective in terms of job recovery.
As for QE's proxy, we would initially like to use total assets purchased by the Federal Reserves as a proxy for QE, since QE is also known as Large Scale Asset Purchasing, but unfortunately we were unable to use it due to small and limited sample size. Therefore, we use the reserve balance to represent QE, as it reflects the total assets purchased by the Federal Reserve. Although there are no literature reviews to support our findings, we believed that when the LNRB increases, unemployment will decrease during a period of financial crisis.
This is because QE is conducted with the intention of boosting economic growth and also supporting the labor market. The result of LNRB in Model 1 from Table 4.7 shows that LNRB and unemployment have a negative relationship and thus the finding is consistent with what we expected.
Implications of Study
- Implications for policy makers
- Implications for Researchers
The Federal Reserve is behaving to return labor market conditions to pre-crisis levels. During the speech entitled "Monetary Policy since the Beginning of the Crisis", given by Ben Bernanke in 2012, he concluded that despite the limitations and difficulties of applying the unconventional policies, the Federal Reserve has acted by all means to support the labor market and strengthen economic growth in the United States In our study of how QE affects Okun's coefficient, we had successfully proved that QE is particularly effective in bringing unemployment back during the financial crisis by looking at the effect of QE on Okun's law conditions.
According to Ball, Leigh, and Loungani (2013), it is not common to call a macroeconomic relationship a “law,” but they believed that Okun's law is indeed strong and stable by the standards of macroeconomics. Therefore, we strongly believed that it is of utmost importance for researchers to consider the effects of QE on the Okun's Law multiplier in their studies on the macroeconomic impact of QE. Because of the complex transmission process that QE affects macroeconomic factors, by studying the effect of QE on the Okun coefficient, researchers can gain a better understanding of how QE helps reduce the unemployment rate by examining QE together with the Okun relationship.
Limitations of the Research
Recommendation for Future Research
This study can be further extended by examining the international spillover effects of QE and Okun's law. For example, researchers should examine the spillover effects of QE and Okun's law in emerging market economies to see whether QE produces a positive or negative spillover effect. Previous researchers have conducted many researches on the spillover effects of QE, but no research has been done on the spillover effect of QE and Okun's law.
Conclusion
