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Estimating the Natural Rate of Unemployment and Testing the Natural Rate Hypothesis

  • Salemi, Michael K
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    How should one measure the natural rate of unemployment? This paper proposes a systems procedure as an alternative to NAIRU. The natural rate is treated as an unobserved state variable in a system that includes measurement equations for the unemployment rate, the rate of wage growth and the rate of inflation. The model is derived from a version of the wage bargaining model of Blanchard and embodies a version of the natural rate hypothesis. The model is estimated by embedding the Kalman filter within the full-information maximum likelihood procedure. For US data, the estimated model implies substantial post-war variation in the natural rate and a negative, but weak, effect of inflation surprises on unemployment.

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    Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

    Volume (Year): 14 (1999)
    Issue (Month): 1 (Jan.-Feb.)
    Pages: 1-25

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    Handle: RePEc:jae:japmet:v:14:y:1999:i:1:p:1-25
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    1. Froyen, Richard T & Waud, Roger N, 1985. "Demand Variability, Supply Shocks and the Output-Inflation Tradeoff," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 9-15, February.
    2. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers.
    3. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
    4. Pesaran, M.H. & Smith, R., 1993. "The Natural Rate Hypothesis and its Testable Implications," Cambridge Working Papers in Economics 9314, Faculty of Economics, University of Cambridge.
    5. 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.
    6. Michael Woodford, 1994. "Structural Slumps," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1784-1815, December.
    7. Matthew Shapiro & Mark Watson, 1988. "Sources of Business Cycles Fluctuations," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156 National Bureau of Economic Research, Inc.
    8. Olivier Blanchard & Lawrence F. Katz, 1996. "What We Know and Do Not Know About the Natural Rate of Unemployment," NBER Working Papers 5822, National Bureau of Economic Research, Inc.
    9. Blanchard, Olivier Jean, 1991. "Wage Bargaining and Unemployment Persistence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 277-92, August.
    10. Olivier Jean Blanchard, 1988. "Unemployment: Getting the Questions Right - and some of the answers," NBER Working Papers 2698, National Bureau of Economic Research, Inc.
    11. Salop, Steven C, 1979. "A Model of the Natural Rate of Unemployment," American Economic Review, American Economic Association, vol. 69(1), pages 117-25, March.
    12. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    13. 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.
    14. James K. Galbraith, 1997. "Time to Ditch the NAIRU," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 93-108, Winter.
    15. Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56.
    16. Santomero, Anthony M & Seater, John J, 1978. "The Inflation-Unemployment Trade-off: A Critique of the Literature," Journal of Economic Literature, American Economic Association, vol. 16(2), pages 499-544, June.
    17. Bean, Charles R, 1994. "European Unemployment: A Survey," Journal of Economic Literature, American Economic Association, vol. 32(2), pages 573-619, June.
    18. Paul R. Krugman, 1994. "Past and prospective causes of high unemployment," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Jan, pages 49-98.
    19. Johnson, G.E. & Layard, P.R.G., 1987. "The natural rate of unemployment: Explanation and policy," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 2, chapter 16, pages 921-999 Elsevier.
    20. 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.
    21. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345, July.
    22. Joseph Stiglitz, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter.
    23. Richard Rogerson, 1997. "Theory Ahead of Language in the Economics of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 73-92, Winter.
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