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The (Ir)Relevance Of The Nru For Policy Making: The Case Of Denmark

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  • Marika Karanassou
  • Hector Sala
  • Pablo F. Salvador

Abstract

We reconsider the central role of the natural rate of unemployment (NRU) in forming policy decisions. We show that the unemployment rate does not gravitate towards the NRU due to frictional growth, a phenomenon that encapsulates the interplay between lagged adjustment processes and growth in dynamic labour market systems. We choose Denmark as the focal point of our empirical analysis and find that the NRU explains only 33% of the unemployment variation, while frictional growth accounts for the remaining 67%. Therefore, our theoretical and empirical findings raise serious doubts as to whether the NRU should play a key instrumental role in policy making.

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Bibliographic Info

Article provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.

Volume (Year): 55 (2008)
Issue (Month): 3 (07)
Pages: 369-392

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Handle: RePEc:bla:scotjp:v:55:y:2008:i:3:p:369-392

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Cited by:
  1. Martin Leites & Sylvina Porras, 2013. "El enfoque de la Reacción en Cadena: una aplicación para explicar la dinámica del desempleo en Uruguay," Documentos de Trabajo (working papers) 13-11, Instituto de Economía - IECON.
  2. Marika Karanassou & Hector Sala, 2012. "Productivity Growth And The Phillips Curve: A Reassessment Of The Us Experience," Bulletin of Economic Research, Wiley Blackwell, Wiley Blackwell, vol. 64(3), pages 344-366, 07.
  3. Marika Karanassou & Hector Sala & Dennis J. Snower, 2006. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," Working Papers, Queen Mary, University of London, School of Economics and Finance 573, Queen Mary, University of London, School of Economics and Finance.
  4. Marika Karanassou & Hector Sala & Dennis J. Snower, 2007. "The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties," Kiel Working Papers 1350, Kiel Institute for the World Economy.
  5. Karanassou, Marika & Sala, Hector, 2008. "The Rise and Fall of Spanish Unemployment: A Chain Reaction Theory Perspective," IZA Discussion Papers 3712, Institute for the Study of Labor (IZA).

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