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The Time-varying NAIRU and its Implications for Economic Policy

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  • Gordon, Robert J

Abstract

This paper estimates the NAIRU (standing for the Non-Accelerating Inflation Rate of Unemployment) as a parameter that varies over time. The NAIRU is the unemployment rate that is consistent with a constant rate of inflation. Its value is determined in an econometric model in which the inflation rate depends on its own past values (‘inertia’), demand shocks proxied by the difference between the actual unemployment rate and the estimated NAIRU, and a set of supply shock variables. The estimation in this paper applies to the US economy over the period 1955–96. The estimated NAIRU differs somewhat for alternative measures of the inflation rate. The NAIRU estimated for the GDP deflator varies over the past 40 years within the narrow range of 5.7–6.4%; its estimated value for the most recent quarter (1996:Q1) is 5.7%. In that quarter a lower NAIRU of 5.3% is obtained for the chain-weighted personal consumption expenditure (PCE) deflator. Recent research claiming that there is a three-percentage-point range of uncertainty about the NAIRU is rejected as inconsistent with the behaviour of the US economy in the late 1980s and early 1990s.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1492.

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Date of creation: Oct 1996
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Handle: RePEc:cpr:ceprdp:1492

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Keywords: Inflation; Monetary Policy; Phillips Curve;

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References

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  1. King, Robert G. & Watson, Mark W., 1994. "The post-war U.S. phillips curve: a revisionist econometric history," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 157-219, December.
  2. Robert J. Gordon, 1988. "U.S. Inflation, Labor's Share, and the Natural Rate of Unemployment," NBER Working Papers 2585, National Bureau of Economic Research, Inc.
  3. Robert J. Gordon, 1976. "The Theory of Domestic Inflation," Discussion Papers 250, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. 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.
  5. Charles L. Schultze, 1975. "Falling Profits, Rising Profit Margins, and the Full-Employment Profit Rate," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 449-472.
  6. George L. Perry, 1970. "Changing Labor Markets and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(3), pages 411-448.
  7. Robert J. Gordon, 1975. "The Impact of Aggregate Demand on Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(3), pages 613-670.
  8. Robert G. King & James H. Stock & Mark W. Watson, 1995. "Temporal instability of the unemployment-inflation relationship," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 2-12.
  9. Robert E. Lucas, Jr. & Thomas J. Sargent, 1979. "After Keynesian macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  10. Christina D. Romer, 1996. "Inflation and the Growth Rate of Output," NBER Working Papers 5575, National Bureau of Economic Research, Inc.
  11. Barro, Robert J., 1978. "Unanticipated Money, Output, and the Price Level in the United States," Scholarly Articles 3450988, Harvard University Department of Economics.
  12. Barro,Robert J. & Grossman,Herschel I., 2008. "Money Employment and Inflation," Cambridge Books, Cambridge University Press, number 9780521068659, October.
  13. Robert J. Gordon, 1970. "The Recent Acceleration of Inflation and Its Lessons for the Future," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(1), pages 8-47.
  14. Robert J. Gordon & Stephen R. King, 1982. "The Output Cost of Disinflation in Traditional and Vector Autoregressive Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 205-244.
  15. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
  16. Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Price Expectations and the Phillips Curve," American Economic Review, American Economic Association, vol. 59(3), pages 342-50, June.
  17. Robert J. Gordon, 1981. "Inflation, Flexible Exchange Rates, and the Natural Rate of Unemployment," NBER Working Papers 0708, National Bureau of Economic Research, Inc.
  18. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September.
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