This is part of my econometrics module. It should follow an essay format, which
means you must add an introduction, analysis and conclusion. You must also include the R
codes in the Appendix (the codes will not count towards the word limit). The word limit of the
text is 750. You should add tables as figures to avoid exceeding your word limit. You are
encouraged to use at least Wooldridge (2012) and Heiss (2016) in order to provide references
for your tests and rationale.
Your task is to test the Okun’s Law (Okun, 1962), i.e., that if unemployment rates are stable,
real GDP grows at 3% annually. However, for each percentage point increase in the
unemployment rate, real GDP will grow by two percentage points less.
Using the OKUN dataset that compiles data for the U.S. economy, please estimate the
following econometric model:
𝑝𝑐𝑟𝑔𝑑𝑝𝑡 = 𝛽0 + 𝛽1𝑐𝑢𝑛𝑒𝑚𝑡 + 𝑢𝑡
where 𝑝𝑐𝑟𝑔𝑑𝑝 is the annual percentage change in real GDP, 𝑐𝑢𝑛𝑒𝑚 is the change in the
annual unemployment rate and the subscript 𝑡 refers to the time period.
First, you must test and address (if appropriate) heteroskedasticity and serial correlation. Be
specific about the steps you have taken and the reasoning behind the decisions you make on
how to proceed. You can also compare the models with and without heteroskedasticity and
serial correlation (if appropriate).
Second, you must interpret the results of your final regression. You must mention the
coefficients, statistical significance, R-squared and F-statistics. Be precise and explain the
meaning and/or null hypothesis of each concept if necessary.
Finally, you need to conclude if your results are in line with Okun’s Law.