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The (Ir)relevance of the NRU for Policy Making: The Case of Denmark

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  • Marika Karanassou

    ()
    (Queen Mary, University of London, and IZA)

  • Hector Sala

    ()
    (Universitat Aut�noma de Barcelona, and IZA)

  • Pablo F. Salvador

    ()
    (Universitat Aut�noma de Barcelona, and Universitat de Girona)

Abstract

We reconsider the central role of the natural rate of unemployment (NRU) in forming policy decisions. We show that the unemployment rate does not gravitate towards the NRU due to frictional growth, a phenomenon that encapsulates the interplay between lagged adjustment processes and growth in dynamic labour market systems. We choose Denmark as the focal point of our empirical analysis and find that the NRU explains only 33% of the unemployment variation, while frictional growth accounts for the remaining 67%. Therefore, our theoretical and empirical findings raise serious doubts as to whether the NRU should play a key instrumental role in policy making.

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Paper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 580.

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Date of creation: Nov 2006
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Handle: RePEc:qmw:qmwecw:wp580

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Keywords: Unemployment; Natural rate of unemployment; Labour market dynamics; Frictional growth; Chain reaction theory;

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Cited by:
  1. Marika Karanassou & Hector Sala & Dennis J. Snower, 2007. "The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties," Kiel Working Papers 1350, Kiel Institute for the World Economy.
  2. Karanassou, Marika & Sala, Hector, 2008. "The Rise and Fall of Spanish Unemployment: A Chain Reaction Theory Perspective," IZA Discussion Papers 3712, Institute for the Study of Labor (IZA).
  3. Marika Karanassou & Hector Sala, 2008. "Productivity Growth and the Phillips Curve: A Reassessment of the US Experience," Working Papers 623, Queen Mary, University of London, School of Economics and Finance.
  4. Marika Karanassou & Hector Sala & Dennis Snower, 2008. "Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective," Kiel Working Papers 1441, Kiel Institute for the World Economy.
  5. Martin Leites & Sylvina Porras, 2013. "El enfoque de la Reacción en Cadena: una aplicación para explicar la dinámica del desempleo en Uruguay," Documentos de Trabajo (working papers) 13-11, Instituto de Economía - IECON.

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