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Estimating the Natural Rate of Unemployment and Testing the Natural Rate Hypothesis

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  • Salemi, Michael K
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    Abstract

    How should one measure the natural rate of unemployment? This paper proposes a systems procedure as an alternative to NAIRU. The natural rate is treated as an unobserved state variable in a system that includes measurement equations for the unemployment rate, the rate of wage growth and the rate of inflation. The model is derived from a version of the wage bargaining model of Blanchard and embodies a version of the natural rate hypothesis. The model is estimated by embedding the Kalman filter within the full-information maximum likelihood procedure. For US data, the estimated model implies substantial post-war variation in the natural rate and a negative, but weak, effect of inflation surprises on unemployment.

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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

    Volume (Year): 14 (1999)
    Issue (Month): 1 (Jan.-Feb.)
    Pages: 1-25

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    Handle: RePEc:jae:japmet:v:14:y:1999:i:1:p:1-25

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    1. Olivier Jean Blanchard, 1988. "Unemployment: Getting the Questions Right - and some of the answers," NBER Working Papers 2698, National Bureau of Economic Research, Inc.
    2. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers 870, Cowles Foundation for Research in Economics, Yale University.
    3. Salop, Steven C, 1979. "A Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, vol. 69(1), pages 117-25, March.
    4. Olivier Jean Blanchard, 1991. "Wage Bargaining and Unemployment Persistence," NBER Working Papers 3664, National Bureau of Economic Research, Inc.
    5. Froyen, Richard T & Waud, Roger N, 1985. "Demand Variability, Supply Shocks and the Output-Inflation Tradeoff," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 9-15, February.
    6. Robert J. Gordon, 1996. "The Time-Varying NAIRU and its Implications for Economic Policy," NBER Working Papers 5735, National Bureau of Economic Research, Inc.
    7. Michael Woodford, 1994. "Structural Slumps," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1784-1815, December.
    8. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
    9. 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.
    10. James K. Galbraith, 1997. "Time to Ditch the NAIRU," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 93-108, Winter.
    11. Johnson, G.E. & Layard, P.R.G., 1987. "The natural rate of unemployment: Explanation and policy," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 2, chapter 16, pages 921-999 Elsevier.
    12. Richard Rogerson, 1997. "Theory Ahead of Language in the Economics of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 73-92, Winter.
    13. 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.
    14. Paul Krugman, 1994. "Past and prospective causes of high unemployment," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 23-43.
    15. repec:nbr:nberre:0126 is not listed on IDEAS
    16. Joseph Stiglitz, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter.
    17. Adams, Charles & Coe, David T., 1989. "A Systems Approach to Estimating the Natural Rate of Unemployment and Potential Output for the United States," MPRA Paper 8622, University Library of Munich, Germany.
    18. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
    19. Olivier Blanchard & Lawrence F. Katz, 1996. "What We Know and Do Not Know About the Natural Rate of Unemployment," NBER Working Papers 5822, National Bureau of Economic Research, Inc.
    20. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    21. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, September.
    22. Santomero, Anthony M & Seater, John J, 1978. "The Inflation-Unemployment Trade-off: A Critique of the Literature," Journal of Economic Literature, American Economic Association, vol. 16(2), pages 499-544, June.
    23. Pesaran, M.H. & Smith, R., 1993. "The Natural Rate Hypothesis and its Testable Implications," Cambridge Working Papers in Economics 9314, Faculty of Economics, University of Cambridge.
    24. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June.
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    Cited by:
    1. Hiau Looi Kee & Hian Teck Hoon, 2004. "Trade, capital accumulation, and structural unemployment : An empirical study of the Singapore economy," Policy Research Working Paper Series 3272, The World Bank.
    2. King, Thomas B. & Morley, James, 2007. "In search of the natural rate of unemployment," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 550-564, March.
    3. Uluc Aysun & Florence Bouvet & Richard Hofler, 2012. "An alternative measure of structural unemployment," Working Papers 2012-04, University of Central Florida, Department of Economics.
    4. T. Berger & G. Everaert, 2006. "Re-examining the Structural and the Persistence Approach to Unemployment," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 06/383, Ghent University, Faculty of Economics and Business Administration.
    5. James Morley & Tara M. Sinclair, 2005. "Testing for Stationarity and Cointegration in an Unobserved Components Framework," Computing in Economics and Finance 2005 451, Society for Computational Economics.
    6. Michael K. Salemi, 2007. "Long-run and Cyclic Movements in the Unemployment Rate in Hong Kong: A Dynamic, General Equilibrium Approach," Working Papers 192007, Hong Kong Institute for Monetary Research.
    7. Chiarini, Bruno & Piselli, Paolo, 2001. "Identification and dimension of the NAIRU," Economic Modelling, Elsevier, vol. 18(4), pages 585-611, December.
    8. Arabinda Basistha & Richard Startz, 2004. "Measuring the NAIRU with Reduced Uncertainty: A Multiple Indicator-Common Component Approach," Working Papers UWEC-2004-22, University of Washington, Department of Economics.
    9. Emilio Congregado & Antonio Golpe & Simon Parker, 2012. "The dynamics of entrepreneurship: hysteresis, business cycles and government policy," Empirical Economics, Springer, vol. 43(3), pages 1239-1261, December.
    10. Lindblad, Hans & Sellin, Peter, 2003. "The Equilibrium Rate of Unemployment and the Real Exchange Rate: An Unobserved Components System Approach," Working Paper Series 152, Sveriges Riksbank (Central Bank of Sweden).
    11. Basistha, Arabinda & Nelson, Charles R., 2007. "New measures of the output gap based on the forward-looking new Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 498-511, March.
    12. Congregado, Emilio & Golpe, Antonio A. & Carmona, Mónica, 2012. "Looking for hysteresis in coal consumption in the US," Renewable and Sustainable Energy Reviews, Elsevier, vol. 16(5), pages 3339-3343.
    13. Rodríguez, Gabriel, 2009. "Using A Forward-Looking Phillips Curve to Estimate the Output Gap in Peru," Working Papers 2009-010, Banco Central de Reserva del Perú.

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