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The NAIRU, Unemployment and Monetary Policy

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  • Douglas Staiger
  • James H. Stock
  • Mark W. Watson

Abstract

This paper examines the precision of conventional estimates of the NAIRU and the role of the NAIRU and unemployment in forecasting inflation. The authors find that, although there is a clear empirical Phillips relation, the NAIRU is imprecisely estimated, forecasts of inflation are insensitive to the NAIRU, and there are other leading indicators of inflation that are at least as good as unemployment. This suggests deemphasizing the NAIRU in public discourse about monetary policy and instead drawing on a richer variety of leading indicators of inflation.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.11.1.33
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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 11 (1997)
Issue (Month): 1 (Winter)
Pages: 33-49

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Handle: RePEc:aea:jecper:v:11:y:1997:i:1:p:33-49

Note: DOI: 10.1257/jep.11.1.33
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  1. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis and the European Unemployment Problem," Working papers 427, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Stephen G. Cecchetti, 1996. "Inflation Indicators and Inflation Policy," NBER Working Papers 5161, National Bureau of Economic Research, Inc.
  3. Robert G. King & Mark W. Watson, 1994. "The post-war U.S. Phillips curve: a revisionist econometric history," Working Paper Series, Macroeconomic Issues 94-14, Federal Reserve Bank of Chicago.
  4. Nelson, Charles R & Startz, Richard, 1990. "Some Further Results on the Exact Small Sample Properties of the Instrumental Variable Estimator," Econometrica, Econometric Society, vol. 58(4), pages 967-76, July.
  5. Geoffrey M.B. Tootell, 1994. "Restructuring, the NAIRU, and the Phillips curve," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 31-44.
  6. Douglas Staiger & James H. Stock & Mark W. Watson, 1996. "How Precise are Estimates of the Natural Rate of Unemployment?," NBER Working Papers 5477, National Bureau of Economic Research, Inc.
  7. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September.
  8. James H. Stock & Mark W. Watson, 1994. "Evidence on Structural Instability in Macroeconomic Time Series Relations," NBER Technical Working Papers 0164, National Bureau of Economic Research, Inc.
  9. Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56.
  10. Roy Cromb, 1993. "A Survey of Recent Econometric Work on the NAIRU," Journal of Economic Studies, Emerald Group Publishing, vol. 20(1/2), pages 27-51, January.
  11. Paul Krugman, 1994. "Past and prospective causes of high unemployment," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 23-43.
  12. Stuart E. Weiner, 1993. "New estimates of the natural rate of unemployment," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 53-69.
  13. Stuart E. Weiner, 1994. "The natural rate and inflationary pressures," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-9.
  14. Robert G. King & James H. Stock & Mark W. Watson, 1995. "Temporal instability of the unemployment-inflation relationship," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 2-12.
  15. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-68, July.
  16. Christina D. Romer & David H. Romer, 1997. "Reducing Inflation: Motivation and Strategy," NBER Books, National Bureau of Economic Research, Inc, number rome97-1.
  17. Ray C. Fair, 1996. "Testing the Standard View of the Long-Run Unemployment-Inflation Relationship," Cowles Foundation Discussion Papers 1121, Cowles Foundation for Research in Economics, Yale University.
  18. Kenneth Kuttner, 1992. "Monetary policy with uncertain estimates of potential output," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 2-15.
  19. Chinhui Juhn & Kevin M. Murphy & Robert H. Topel, 1991. "Why Has the Natural Rate of Unemployment Increased over Time?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 75-142.
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