Claar, Victor V (2002): Is the NAIRU More Useful in Forecasting Inflation than the Natural Rate of Unemployment? Published in: Applied Economics , Vol. 38, No. 18 (October 2006): pp. 2179-2189.
Download (380kB) | Preview
Recent studies have indicated that the terms 'NAIRU' (non-accelerating inflation rate of unemployment) and 'natural rate of unemployment' are not interchangeable. While NAIRU is an empirical macroeconomic relationship estimated via a Phillips curve, the natural rate is an equilibrium condition in the labour market, reflecting the market's microeconomic features. This study evaluates comparatively the inflation-forecasting power of alternative time-varying estimates of the natural rate of unemployment relative to the NAIRU. The natural rate of unemployment in the USA since the Second World War is estimated. Three alternative methods are utilized: the Kalman filter, a structural determinants approach, and the Hodrick-Prescott filter. The section that follows assesses how each estimator of the natural rate compares with the others - as well as with the NAIRU derived from a Phillips curve - in forecasting inflationary changes in the USA in the second half of the twentieth century. The analysis reveals that the overall inflation-forecasting utility of the natural rate of unemployment relative to the NAIRU is not very different. Moreover, the conclusion appears to be quite robust to various estimators of the natural rate.
|Item Type:||MPRA Paper|
|Original Title:||Is the NAIRU More Useful in Forecasting Inflation than the Natural Rate of Unemployment?|
|Keywords:||Employment, Unemployment, Wages, Intergenerational Income Distribution; Price Level, Inflation, Deflation; U.S.; Northern America; Inflation; Macroeconomics; NAIRU; Natural Rate; Phillips Curve; Unemployment|
|Subjects:||E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation
|Depositing User:||Victor Claar|
|Date Deposited:||25. Mar 2009 16:13|
|Last Modified:||07. Aug 2015 18:33|
Adams, C. and Coe, D. T. (1990) A systems approach to estimating the natural rate of unemployment and potential output for the United States, IMF Staff Papers, 37, 232-93.
Apel, M. and Jansson, P. (1999a) System estimates of potential output and the NAIRU, Empirical Economics, 24, 373-88.
Apel, M. and Jansson, P. (1999b) A theory-consistent system approach for estimating potential output and the NAIRU, Economics Letters, 64, 271-5.
Ashenfelter, O. and Card, D. (1986) Why have unemployment rates in Canada and the United States diverged?, Economica, 53, S171-95.
Beach, C. M. and MacKinnon, J. G. (1978) A maximum likelihood procedure for regression with autocorrelated errors, Econometrica, 46, 51-8.
Blanchard, O. J. and Quah, D. (1989) The dynamic effects of aggregate demand and supply disturbances, American Economic Review, 79, 655-73.
Chang, R. (1997) Is low employment inflationary?, Economic Review (Federal Reserve Bank of Atlanta), 82(1), 4-13.
Coe, D. T. (1990) Structural determinants of the natural rate of unemployment in Canada, IMF Staff Papers, 37, 94-115.
Espinoza-Vega, M. A. and Russell, S. (1997) History and theory of the NAIRU: a critical review, Economic Review (Federal Reserve Bank of Atlanta), 82(2), 4-25.
Galí, J. (1999) Technology, employment, and the business cycle: do technology shocks explain aggregate fluctuations?, American Economic Review, 89, 249-71.
Gordon, R. J. (1997) The time-varying NAIRU and its implications for economic policy, Journal of Economic Perspectives, 11(1), 11-32.
Gordon, R. J. (1998) Foundations of the Goldilocks economy: supply shocks and the time-varying NAIRU, Brookings Papers on Economic Activity, 2, 297-346.
Grant, A. P. (2002) Time-varying estimates of the natural rate of unemployment: a revisitation of Okun’s law, Quarterly Review of Economics and Finance, 42, 95-113.
Hodrick, R. J. and Prescott, E. C. (1997) Postwar U.S. business cycles: an empirical investigation, Journal of Money, Credit, and Banking, 29, 1-16.
King, R. G., Stock, J. H., and Watson, M. W. (1995) Temporal instability of the unemployment-inflation relationship, Economic Perspectives, 14(3), 2-12.
Kurian, G. T. (1994) Datapedia of the United States 1790-2000: America Year by Year, Bernan Press, Lanham, MD.
Laubach, T. (2001) Measuring the NAIRU: evidence from seven economies, Review of Economics and Statistics, 83, 218-31.
Mankiw, N. G. (2000) Macroeconomics, 4th edn, Worth Publishers, New York.
Mocan, H. N. (1999) Structural unemployment, cyclical unemployment, and income inequality, Review of Economics and Statistics, 81, 122-34.
Roberts, J. M. (1995) New Keynesian economics and the Phillips curve, Journal of Money, Credit, and Banking, 27, 975-84.
Staiger, D., Stock, J. H., and Watson, M. W. (1997a) How precise are estimates of the natural rate of unemployment?, in Romer, C. D. and Romer, D. H., eds., Reducing Inflation: Motivation and Strategy, University of Chicago Press, Chicago and London, 195-242.
Staiger, D., Stock, J. H., and Watson, M. W. (1997b) The NAIRU, unemployment and monetary policy, Journal of Economic Perspectives, 11(1), 33-49.
Wieland, V. (1998) Monetary policy and uncertainty about the natural unemployment rate, Finance and Economics Discussion Series No. 1998-22, Board of Governors of the Federal Reserve System, Washington, D.C., April.
Zavodny, M. (1999) Unions and the wage-productivity gap, Economic Review (Federal Reserve Bank of Atlanta), 84(2), 44-53.