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Estimating NAIRU for Turkey Using Extended Kalman Filter Approach

Author

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  • Vuslat Us

Abstract

This paper estimates NAIRU (Non-Accelerating Inflation Rate of Unemployment) for the Turkish economy by systems approach, which includes an Okun-type relationship between output gap and unemployment gap, a Phillips curve equation, stochastic laws of motion for NAIRU and potential output and time-varying parameters. However, the requirement to simultaneously estimate parameters and to solve the state space problem introduces nonlinearity, which can be handled by Extended Kalman Filter (EKF). Estimation results suggest that NAIRU moves in tandem with the actual unemployment, yet following a more volatile path than the latter. Accordingly, the NAIRU series reacts more sharply to the crises than the actual unemployment. Furthermore, all of the derived series are plausible and capture the significant turning points of the economy. Meanwhile, the time-varying parameters indicate a stable, yet quite a weak link between unemployment and inflation, and a weakening, but significant pass-through to inflation. Moreover, the parameters also imply considerable inertia.

Suggested Citation

  • Vuslat Us, 2014. "Estimating NAIRU for Turkey Using Extended Kalman Filter Approach," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 14(3), pages 63-94.
    • Handle: RePEc:tcb:cebare:v:14:y:2014:i:3:p:63-94
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    File URL: http://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/Main+Menu/Publications/Central+Bank+Review/2014/Volume+14-3/
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    Citations

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    Cited by:

    1. Gonul Sengul & Murat Tasci, 2014. "Unemployment Flows, Participation and the Natural Rate for Turkey," Working Papers 1435, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    2. Sengul, Gonul & Tasci, Murat, 2020. "Unemployment flows, participation, and the natural rate of unemployment: Evidence from turkey," Journal of Macroeconomics, Elsevier, vol. 64(C).

    More about this item

    Keywords

    Household savings; Demographic change; College education; Labor force participation rates; Saving projections;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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