How Precise are Estimates of the Natural Rate of Unemployment?
AbstractThis paper investigates the precision of conventional and unconventional estimates of the natural rate of unemployment (the 'NAIRU'). The main finding is that the NAIRU is imprecisely estimated: a typical 95% confidence interval for the NAIRU in 1990 is 5.1% to 7.7%. This imprecision obtains whether the natural rate is modeled as a constant, as a slowly changing function of time, as an unobserved random walk, or as a function of various labor market fundamentals; it obtains using other series for unemployment and inflation, including additional supply shift variables in the Phillips curve, using monthly or quarterly data, and using various measures for expected inflation. This imprecision suggests caution in using the NAIRU to guide monetary policy.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5477.
Date of creation: Mar 1996
Date of revision:
Publication status: published as Reducing Inflation: Motivation and Strategy, C. Romer and D. Romer(Chicago: University of Chicago Press, 1997)
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- Douglas O. Staiger & James H. Stock & Mark W. Watson, 1997. "How Precise Are Estimates of the Natural Rate of Unemployment?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 195-246 National Bureau of Economic Research, Inc.
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
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