Advanced Search
MyIDEAS: Login to save this paper or follow this series

How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland

Contents:

Author Info

  • Bjarni G. Einarsson
  • Jósef Sigurdsson

Abstract

This 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 Info

If 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.
File URL: http://www.cb.is/library/Skr%C3%A1arsafn---EN/Research/Working%20Paper%20No%2064.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Department of Economics, Central bank of Iceland in its series Economics with number wp64.

as in new window
Length:
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:ice:wpaper:wp64

Contact details of provider:
Postal: Kalkofnsvegi 1, 150 Reykjavik
Phone: 569-9600
Fax: 569-9605
Email:
Web page: http://www.sedlabanki.is/
More information through EDIRC

Related research

Keywords:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Llaudes, Ricardo, 2005. "The Phillips curve and long-term unemployment," Working Paper Series, European Central Bank 0441, European Central Bank.
  2. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198284345, October.
  3. 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.
  4. Olivier J. Blanchard & Lawrence H. Summers, 1986. "Hysteresis And The European Unemployment Problem," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 15-90 National Bureau of Economic Research, Inc.
  5. 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.
  6. Stéphanie Guichard & Elena Rusticelli, 2011. "Reassessing the NAIRUs after the Crisis," OECD Economics Department Working Papers 918, OECD Publishing.
  7. 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, Elsevier, vol. 16(C), pages 1-30.
  8. 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.
  9. Ellis, C.J. & Holden, S., 1991. "Hysteresis and the Seniority-Wage Relationship," Memorandum, Oslo University, Department of Economics 09/1991, Oslo University, Department of Economics.
  10. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 11(1), pages 11-32, Winter.
  11. 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.
  12. Thomas Laubach, 1997. "Measuring the NAIRU : evidence from seven economies," Research Working Paper, Federal Reserve Bank of Kansas City 97-13, Federal Reserve Bank of Kansas City.
  13. 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.
  14. Jósef Sigurdsson, 2011. "Unemployment Dynamics and Cyclical Fluctuations in the Icelandic Labour Market," Economics, Department of Economics, Central bank of Iceland wp56, Department of Economics, Central bank of Iceland.
  15. Laurence M. Ball, 2009. "Hysteresis in Unemployment: Old and New Evidence," NBER Working Papers 14818, National Bureau of Economic Research, Inc.
  16. 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, Department of Economics, Central bank of Iceland wp63, Department of Economics, Central bank of Iceland.
  17. Jaeger, Albert & Parkinson, Martin, 1994. "Some evidence on hysteresis in unemployment rates," European Economic Review, Elsevier, Elsevier, vol. 38(2), pages 329-342, February.
  18. 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.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ice:wpaper:wp64. See general information about how to correct material in RePEc.

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.