Is the natural rate a reference point?
AbstractThis paper explores the two common concepts of the natural rate of unemployment: (i) the stable, long-run equilibrium rate of unemployment; and (ii) the equilibrium unemployment rate at which there is no tendency for this rate to change, given the exogenous variables. The first concept (common in the theoretical literature) is impractical for empirical assessment, since it is generally impossible to find reliable estimates of the long-run values of the exogenous variables and since it is inherently unable to provide an analysis of how the NRU changes through time. Consequently, the second concept is used in empirical studies. The paper shows that this latter natural rate is not necessarily a reference point (a value towards which the equilibrium unemployment rate tends with the passage of time). Specifically, it is not a reference point in multi-equation labour market models containing lagged endogenous variables and exogenous variables with non-zero long-run growth rates. Since these features are exceedingly common, our analysis casts serious doubts on the usefulness of the natural rate hypothesis as a predictive tool.
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Bibliographic InfoArticle provided by Elsevier in its journal European Economic Review.
Volume (Year): 41 (1997)
Issue (Month): 3-5 (April)
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Web page: http://www.elsevier.com/locate/eer
Other versions of this item:
- Karanassou, Marika & Snower, Dennis J., 1996. "Is the Natural Rate a Reference Point?," CEPR Discussion Papers 1507, C.E.P.R. Discussion Papers.
- Marika Karanassou & Dennis Snower, 1996. "Is the Natural Rate a Reference Point?," Archive Discussion Papers 9623, Birkbeck, Department of Economics, Mathematics & Statistics.
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Private Pensions
- J60 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - General
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
- Assar Lindbeck & Dennis J. Snower, 1989. "The Insider-Outsider Theory of Employment and Unemployment," MIT Press Books, The MIT Press, edition 1, volume 1, number 026262074x, June.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005.
"Unemployment: Macroeconomic Performance and the Labour Market,"
Oxford University Press, number 9780199279173.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345.
- Karanassou, Marika & Snower, Dennis J., 1995. "A Contribution to Unemployment Dynamics," CEPR Discussion Papers 1176, C.E.P.R. Discussion Papers.
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