Testing the validity of okun’s rule of thumb across palestine and Israel

Abstract

This study aims at investigating the validity of Okun’s law across Palestine and Israel using quarterly time series data for the period 2000: Q1 - 2014: Q1. Different econometric and statistical techniques of Ordinary Least Square, Granger causality tests, co-integration, and the Vector Error Correction Model are used to accomplish the overall objective of this study. The principal conclusion indicates that the Okun’s law does not hold in both Palestine and Israel, so that policymakers are advised to constantly direct human and other resources from unproductive to sustainable and productive activities that can shift aggregate demand and real output growth upwards. Toward this end, political stability and efficient governance should be taken into account.