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Whatever Happened to Goldilocks? The Role of Expectations in Estimates of the NAIRU in the US and the UK

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  • Rebecca L. Driver
  • Jennifer V. Greenslade
  • Richard G. Pierse

Abstract

During the second half of the 1990s the US economy was characterized as the Goldilocks economy: not too hot, nor too cold, but just right. It was argued that this represented a new paradigm, enabling unemployment to remain low without igniting inflationary pressure. We examine the evidence for a change in the relationship between inflation and unemployment for the US and UK using Phillips curve models. The impact of including explicit inflation expectations is also considered. Inflation expectations are found to play an important role, particularly in the US. When expectations are included there is still evidence that the non-accelerating inflation rate of unemployment (NAIRU) steadily declined during the late 1990s, although this decline in the US NAIRU is not found solely in the 1990s. Copyright 2006 Blackwell Publishing Ltd.

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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.

Volume (Year): 68 (2006)
Issue (Month): 1 (02)
Pages: 45-79

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Handle: RePEc:bla:obuest:v:68:y:2006:i:1:p:45-79

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