Testing the Causal Nexus between Output and Unemployment: Swedish Data

Abstract

In this paper we aim at testing for the Granger causality test between real GDP and unemployment in Sweden. We model a VAR (4) model on Swedish two macro-economic variables, namely, the gross domestic product (GDP) and unemployment (Un) for the period 1993:Q1 – 2011:Q2. Our main aim is to supporting further empirical evidence so as to identify the relationship between the GDP and unemployment in terms of females, males and total unemployment, with special reference to Sweden. A Granger causality test is used. The test shows that it is the GDP Granger that causes unemployment but not the other way around. An econometric model is deployed and developed on the basis of Okun's Law. Total unemployment, male unemployment and female unemployment coefficients of the relationship between the GDP and unemployment coefficients are diverted from Okun's coefficient and they are found to be approximately 8 per cent and statistically significant for Sweden. This stayed almost steady over time. This result also has important implications for determining macroeconomic policy.