How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland
AbstractThis paper estimates the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) for Iceland based on the Phillips curve using an iterative regression process and the Kalman filter. According to our results, the NAIRU rose sharply in the wake of the financial crisis, peaking at 5½% or 7% depending on estimation methodology. We evaluate what factors influence changes in the NAIRU. In particular, we assess whether changes in the NAIRU have been influenced by structural changes or changes in actual unemployment and therefore aggregate demand; i.e., whether there is evidence of hysteresis in unemployment. We find that time variation in the NAIRU is to a large extent due to hysteresis effects but to a lesser extent due to structural factors. This implies that monetary policy can have long-run effects on unemployment and its conduct is thus more complicated. Prudence in the government’s conduct of fiscal policy and labor unions’ and their counterparties’ wage bargaining becomes more important in the presence of hysteresis in unemployment, as inflationary pressures must be countered with a rise in interest rates, which can cause an increase in the NAIRU. Keeping inflation low becomes more important for the real economy in the presence of hysteresis in unemployment.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Department of Economics, Central bank of Iceland in its series Economics with number wp64.
Date of creation: Jul 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-07-28 (All new papers)
- NEP-LAB-2013-07-28 (Labour Economics)
- NEP-MAC-2013-07-28 (Macroeconomics)
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.:
- Stéphanie Guichard & Elena Rusticelli, 2010. "Assessing the Impact of the Financial Crisis on Structural Unemployment in OECD Countries," OECD Economics Department Working Papers 767, OECD Publishing.
- Gordon, Robert J, 1996.
"The Time-varying NAIRU and its Implications for Economic Policy,"
CEPR Discussion Papers
1492, C.E.P.R. Discussion Papers.
- Robert J. Gordon, 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.
- Robert J. Gordon, 1997. "The Time-Varying NAIRU and its Implications for Economic Policy," NBER Working Papers 5735, National Bureau of Economic Research, Inc.
- David E. Card & Jochen Kluve & Andrea Weber, 2009.
"Active Labor Market Policy Evaluations: A Meta-analysis,"
NRN working papers
2009-02, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.
- David Card & Jochen Kluve & Andrea Weber, 2010. "Active Labour Market Policy Evaluations: A Meta-Analysis," Economic Journal, Royal Economic Society, vol. 120(548), pages F452-F477, November.
- David Card & Jochen Kluve & Andrea Weber, 2009. "Active Labor Market Policy Evaluations: A Meta-analysis," CESifo Working Paper Series 2570, CESifo Group Munich.
- Card, David & Kluve, Jochen & Weber, Andrea, 2009. "Active Labor Market Policy Evaluations: A Meta-Analysis," IZA Discussion Papers 4002, Institute for the Study of Labor (IZA).
- David Card & Jochen Kluve & Andrea Weber, 2010. "Active Labor Market Policy Evaluations: A Meta-Analysis," NBER Working Papers 16173, National Bureau of Economic Research, Inc.
- David Card & Jochen Kluve & Andrea Weber, 2009. "Active Labor Market Policy Evaluations – A Meta-analysis," Ruhr Economic Papers 0086, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
- Jaeger, Albert & Parkinson, Martin, 1994. "Some evidence on hysteresis in unemployment rates," European Economic Review, Elsevier, vol. 38(2), pages 329-342, February.
- Llaudes, Ricardo, 2005. "The Phillips curve and long-term unemployment," Working Paper Series 0441, European Central Bank.
- Olivier J. Blanchard & Lawrence H. Summers, 1986.
"Hysteresis and the European Unemployment Problem,"
427, Massachusetts Institute of Technology (MIT), Department of Economics.
- Thomas Laubach, 2001.
"Measuring The NAIRU: Evidence From Seven Economies,"
The Review of Economics and Statistics,
MIT Press, vol. 83(2), pages 218-231, May.
- Thomas Laubach, 1997. "Measuring the NAIRU : evidence from seven economies," Research Working Paper 97-13, Federal Reserve Bank of Kansas City.
- Laurence Ball & N. Gregory Mankiw, 2002.
"The NAIRU in Theory and Practice,"
NBER Working Papers
8940, National Bureau of Economic Research, Inc.
- Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Harvard Institute of Economic Research Working Papers 1963, Harvard - Institute of Economic Research.
- Laurence Ball & N Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Economics Working Paper Archive 475, The Johns Hopkins University,Department of Economics.
- Jósef Sigurdsson, 2011. "Unemployment Dynamics and Cyclical Fluctuations in the Icelandic Labour Market," Economics wp56, Department of Economics, Central bank of Iceland.
- Bjarni G. Einarsson & Gudjón Emilsson & Svava J. Haraldsdóttir & Thórarinn G. Pétursson & Rósa B. Sveinsdóttir, 2013. "On our own? The Icelandic business cycle in an international context," Economics wp63, Department of Economics, Central bank of Iceland.
- Ellis, C.J. & Holden, S., 1991. "Hysteresis and the Seniority-Wage Relationship," Memorandum 09/1991, Oslo University, Department of Economics.
- Joshua Aizenman & Brian Pinto & Vladyslav Sushko, 2013.
"Financial sector ups and downs and the real sector in the open economy: Up by the stairs, down by the parachute,"
BIS Working Papers
411, Bank for International Settlements.
- Aizenman, Joshua & Pinto, Brian & Sushko, Vladyslav, 2013. "Financial sector ups and downs and the real sector in the open economy: Up by the stairs, down by the parachute," Emerging Markets Review, Elsevier, vol. 16(C), pages 1-30.
- Alan B. Krueger & Andreas Mueller, 2011. "Job Search, Emotional Well-Being and Job Finding in a Period of Mass Unemployment: Evidence from High-Frequency Longitudinal Data," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 1-81.
- Stéphanie Guichard & Elena Rusticelli, 2011. "Reassessing the NAIRUs after the Crisis," OECD Economics Department Working Papers 918, OECD Publishing.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991.
"Unemployment: Macroeconomic Performance and the Labour Market,"
Oxford University Press, number 9780198284345.
- Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
- Christian Gianella & Isabell Koske & Elena Rusticelli & Olivier Chatal, 2008. "What Drives the NAIRU? Evidence from a Panel of OECD Countries," OECD Economics Department Working Papers 649, OECD Publishing.
- Laurence M. Ball, 2009. "Hysteresis in Unemployment: Old and New Evidence," NBER Working Papers 14818, National Bureau of Economic Research, Inc.
- Pete Richardson & Laurence Boone & Claude Giorno & Mara Meacci & David Rae & David Turner, 2000. "The Concept, Policy Use and Measurement of Structural Unemployment: Estimating a Time Varying NAIRU Across 21 OECD Countries," OECD Economics Department Working Papers 250, OECD Publishing.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Central Bank of Iceland).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.