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Is the NAIRU More Useful in Forecasting Inflation than the Natural Rate of Unemployment?

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  • Claar, Victor V

Abstract

Recent studies have indicated that the terms 'NAIRU' (non-accelerating inflation rate of unemployment) and 'natural rate of unemployment' are not interchangeable. While NAIRU is an empirical macroeconomic relationship estimated via a Phillips curve, the natural rate is an equilibrium condition in the labour market, reflecting the market's microeconomic features. This study evaluates comparatively the inflation-forecasting power of alternative time-varying estimates of the natural rate of unemployment relative to the NAIRU. The natural rate of unemployment in the USA since the Second World War is estimated. Three alternative methods are utilized: the Kalman filter, a structural determinants approach, and the Hodrick-Prescott filter. The section that follows assesses how each estimator of the natural rate compares with the others - as well as with the NAIRU derived from a Phillips curve - in forecasting inflationary changes in the USA in the second half of the twentieth century. The analysis reveals that the overall inflation-forecasting utility of the natural rate of unemployment relative to the NAIRU is not very different. Moreover, the conclusion appears to be quite robust to various estimators of the natural rate.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 14257.

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Date of creation: 2002
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Publication status: Published in Applied Economics 18.38(2006): pp. 2179-2189
Handle: RePEc:pra:mprapa:14257

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Keywords: Employment; Unemployment; Wages; Intergenerational Income Distribution; Price Level; Inflation; Deflation; U.S.; Northern America; Inflation; Macroeconomics; NAIRU; Natural Rate; Phillips Curve; Unemployment;

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  1. Charles Adams & David T. Coe, 1990. "A Systems Approach to Estimating the Natural Rate of Unemployment and Potential Output for the United States," IMF Staff Papers, Palgrave Macmillan, vol. 37(2), pages 232-293, June.
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  7. Grant, Alan P., 2002. "Time-varying estimates of the natural rate of unemployment: a revisitation of Okun's law," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(1), pages 95-113.
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  13. Roberto Chang, 1997. "Is low unemployment inflationary?," Economic Review, Federal Reserve Bank of Atlanta, issue Q I, pages 4-13.
  14. Marco A. Espinosa-Vega & Steven Russell, 1997. "History and theory of the NAIRU: a critical review," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 4-25.
  15. Volker Wieland, 1998. "Monetary policy and uncertainty about the natural unemployment rate," Finance and Economics Discussion Series 1998-22, Board of Governors of the Federal Reserve System (U.S.).
  16. Ashenfelter, Orley & Card, David, 1986. "Why Have Unemployment Rates in Canada and the United States Diverged?," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S171-95, Supplemen.
  17. Madeline Zavodny, 1999. "Unions and the wage-productivity gap," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 44-53.
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Cited by:
  1. Díaz, Antonio & Jareño, Francisco, 2009. "Explanatory factors of the inflation news impact on stock returns by sector: The Spanish case," Research in International Business and Finance, Elsevier, vol. 23(3), pages 349-368, September.
  2. Sandeep Mazumder, 2014. "The Impact of Educational Attainment and Gender on the Inflation-Unemployment Tradeoff," Economics Bulletin, AccessEcon, vol. 34(2), pages 651-662.
  3. Wolfgang Pollan, 2013. "Inflation Persistence or the Protracted Effects of Commodity Price Changes?," WIFO Working Papers 451, WIFO.
  4. Bozani, Vasiliki & Drydakis, Nick, 2011. "Studying the NAIRU and its Implications," IZA Discussion Papers 6079, Institute for the Study of Labor (IZA).

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