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How Precise are Estimates of the Natural Rate of Unemployment?

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  • Douglas Staiger
  • James H. Stock
  • Mark W. Watson

Abstract

This 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 Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5477.

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Date of creation: Mar 1996
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Publication status: published as Reducing Inflation: Motivation and Strategy, C. Romer and D. Romer(Chicago: University of Chicago Press, 1997)
Handle: RePEc:nbr:nberwo:5477

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  1. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, Octomber.
  2. Stuart E. Weiner, 1993. "New estimates of the natural rate of unemployment," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 53-69.
  3. Steve J. Davis & John Haltiwanger, 1991. "Gross Job Creation, Gross Job Destruction and Employment Reallocation," NBER Working Papers 3728, National Bureau of Economic Research, Inc.
  4. Kenneth Kuttner, 1992. "Monetary policy with uncertain estimates of potential output," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 2-15.
  5. Cooley, Thomas F & Prescott, Edward C, 1973. "An Adaptive Regression Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(2), pages 364-71, June.
  6. Giuseppe Bertola & Ricardo J. Caballero, 1993. "Cross Sectional Efficiency and Labor Hoarding in an Matching Model of Unemployment," NBER Working Papers 4472, National Bureau of Economic Research, Inc.
  7. Geoffrey M.B. Tootell, 1994. "Restructuring, the NAIRU, and the Phillips curve," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 31-44.
  8. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
  9. Stephen G. Cecchetti, 1995. "Inflation Indicators and Inflation Policy," NBER Working Papers 5161, National Bureau of Economic Research, Inc.
  10. Setterfield, M.A. & Gordon, D.V. & Osberg, L., 1990. "Searching For A Will O'The Wisp: An Empirical Study Of The Nairu In Canada," Department of Economics at Dalhousie University working papers archive 90-04, Dalhousie, Department of Economics.
  11. Cooley, Thomas F & Prescott, Edward C, 1973. "Tests of an Adaptive Regression Model," The Review of Economics and Statistics, MIT Press, vol. 55(2), pages 248-56, May.
  12. Bai, Jushan, 1997. "Estimating Multiple Breaks One at a Time," Econometric Theory, Cambridge University Press, vol. 13(03), pages 315-352, June.
  13. Cooley, Thomas F & Prescott, Edward C, 1976. "Estimation in the Presence of Stochastic Parameter Variation," Econometrica, Econometric Society, vol. 44(1), pages 167-84, January.
  14. Gordon, Robert J, 1990. "What Is New-Keynesian Economics?," Journal of Economic Literature, American Economic Association, vol. 28(3), pages 1115-71, September.
  15. Victor Zarnowitz & Phillip Braun, 1993. "Twenty-two Years of the NBER-ASA Quarterly Economic Outlook Surveys: Aspects and Comparisons of Forecasting Performance," NBER Chapters, in: Business Cycles, Indicators and Forecasting, pages 11-94 National Bureau of Economic Research, Inc.
  16. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-68, July.
  17. 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.
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