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

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Author Info
Salemi, Michael K
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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File URL: http://qed.econ.queensu.ca:80/jae/1999-v14.1/
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Publisher 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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References listed on IDEAS
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.:

  1. Rogerson, Richard, 1997. "Theory Ahead of Language in the Economics of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 73-92, Winter. [Downloadable!] (restricted)
  2. Olivier Jean Blanchard, 1991. "Wage Bargaining and Unemployment Persistence," NBER Working Papers 3664, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. 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.
  4. Gordon, Robert J, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter. [Downloadable!] (restricted)
    Other versions:
  5. Paul Krugman, 1994. "Past and prospective causes of high unemployment," Proceedings, Federal Reserve Bank of Kansas City, issue Jan, pages 49-98.
    Other versions:
  6. 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. [Downloadable!] (restricted)
  7. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June. [Downloadable!] (restricted)
  8. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
  10. Galbraith, James K, 1997. "Time to Ditch the NAIRU," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 93-108, Winter. [Downloadable!] (restricted)
  11. 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. [Downloadable!]
  12. 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. [Downloadable!] (restricted)
  13. 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. [Downloadable!] (restricted)
  14. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September. [Downloadable!] (restricted)
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  15. 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. [Downloadable!] (restricted)
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  16. Olivier Jean Blanchard, 1988. "Unemployment: Getting the Questions Right--and Some of the Answers," Working papers 502, Massachusetts Institute of Technology (MIT), Department of Economics.
    Other versions:
  17. Blanchard, Olivier & Katz, Lawrence F, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter. [Downloadable!] (restricted)
    Other versions:
  18. Richard T. Froyen & Roger N. Waud, 1985. "Demand Variability, Supply Shocks and the Output-Inflation Tradeoff," NBER Working Papers 1081, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  19. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers 870, Cowles Foundation, Yale University. [Downloadable!]
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  20. 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.
  21. Michael Woodford, 1994. "Structural Slumps," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1784-1815, December. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. 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). [Downloadable!]
  2. 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. [Downloadable!]
  3. Congregado, Emilio & Golpe, Antonio A. & Parker, Simon C., 2009. "The Dynamics of Entrepreneurship: Hysteresis, Business Cycles and Government Policy," IZA Discussion Papers 4093, Institute for the Study of Labor (IZA). [Downloadable!]
  4. 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. [Downloadable!]
  5. Arabinda Basistha & Richard Startz, 2005. "Measuring the NAIRU with Reduced Uncertainty: A Multiple Indicator-Common Component Approach," Computing in Economics and Finance 2005 46, Society for Computational Economics. [Downloadable!]
    Other versions:
  6. Thomas B. King & James Morley, 2005. "In search of the natural rate of unemployment," Supervisory Policy Analysis Working Papers 2005-05, Federal Reserve Bank of St. Louis. [Downloadable!]
  7. 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. [Downloadable!]
  8. 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. [Downloadable!]
    Other versions:
  9. 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. [Downloadable!]
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