Relevance of Okun's Law in Montenegro

The purpose of this paper is to examine whether the Okun's law is valid in case of Montenegro. This paper investigates short-term and long-term relationships between uneployment rate and economic growth in Montenegro with the goal to estimate the Okun's coefficient. In this reserach Okun's law was tested by implementing the first difference model.The analysis has been carried out according to standard econometric methodology considering static and dynamic regression model specifications. In the first part of the analysis, the two analyzed series are tested for stationary and co-integration and then the classical linear regression model was estimated. In the second part of the analysis the Error Correction Method (ECM) was applied, which in addition to quantifying the relationship between the unemployment rate and the economic growth rate, also enables the unemployment rate forecasting. The key finding of this paper is that the value of unemployment rate will decrease by 0.275534% in short term and by 1.46794% in long term for every 1% increase in economic growth rate. This implies that the Okun's low is valid in Montenegro.