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Measuring the NAIRU with Reduced Uncertainty: A Multiple Indicator-Common Component Approach

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Arabinda Basistha
Richard Startz

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Abstract

Standard estimates of the NAIRU or natural rate of unemployment are subject to considerable uncertainty. We show in this paper that using multiple indicators to extract an estimated NAIRU cuts in half uncertainty as measured by variance. The inclusion of an Okun’s Law relation is particularly valuable. We estimate the NAIRU as an unobserved component in a state-space model and show that using multiple indicators reduces both parametric uncertainty and filtering uncertainty. Additionally, our multivariate approach overcomes the “pile-up” problem observed by other investigators.

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Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2004-22.

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Date of creation: Sep 2004
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Handle: RePEc:udb:wpaper:uwec-2004-22

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  1. repec:cup:macdyn:v:6:y:2002:i:1:p:111-44 is not listed on IDEAS
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  3. 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.
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  7. Thomas Laubach, 2001. "Measuring The NAIRU: Evidence From Seven Economies," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 218-231, May. [Downloadable!] (restricted)
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  8. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-34, June.
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  11. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1998-2), pages 297-346. [Downloadable!]
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  20. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May. [Downloadable!] (restricted)
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  21. Douglas Staiger & James H. Stock & Mark W. Watson, 1996. "How Precise are Estimates of the Natural Rate of Unemployment?," NBER Working Papers 5477, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  23. Thomas Laubach & John C. Williams, 2003. "Measuring the Natural Rate of Interest," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1063-1070, November. [Downloadable!] (restricted)
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  24. Charles Nelson & Eric Zivot, 2000. "Why are Beveridge-Nelson and Unobserved-Component Decompositions of GDP so Different?," Econometric Society World Congress 2000 Contributed Papers 0692, Econometric Society. [Downloadable!]
  25. Robert G. King & Mark W. Watson, 1994. "The post-war U.S. Phillips curve: a revisionist econometric history," Working Paper Series, Macroeconomic Issues 94-14, Federal Reserve Bank of Chicago.
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  28. Laurence H. Meyer & Eric T. Swanson & Volker W. Wieland, 2001. "NAIRU Uncertainty and Nonlinear Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 226-231, May. [Downloadable!] (restricted)
    Other versions:
  29. Athanasios Orphanides & John C. Williams, 2003. "Robust monetary policy rules with unknown natural rates," Finance and Economics Discussion Series 2003-11, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  30. Lawrence H. Summers, 1987. "Why is the Unemployment Rate So Very High Near Full Employment?"," NBER Reprints 0838, National Bureau of Economic Research, Inc.
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  1. Mark W. Watson, 2007. "How accurate are real-time estimates of output trends and gaps?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 143-161. [Downloadable!]
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