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Estimating the time-varying NAIRU for Germany and policy implications

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  • Yu Hsing

Abstract

This article extends Ball and Mankiw (2002) and applies the Hodrick-Prescott filter (1997) to estimate the time-varying NAIRU for Germany. The slope estimate of the Phillips curve is insignificant when the widely used lagged inflation rate πt-1 is selected as a proxy for the expected inflation rate. The average inflation rate in past 4 years is a better proxy for the expected inflation rate. Estimated NAIRUs with λ = 1000 show a steady rising trend. The estimated NAIRU of 9.84% with λ = 1000 in 2005 is slightly higher than the actual unemployment rate of 9.70% in 2005, suggesting that monetary easing or large deficit spending may cause the inflation rate to accelerate.

Suggested Citation

  • Yu Hsing, 2009. "Estimating the time-varying NAIRU for Germany and policy implications," Applied Economics Letters, Taylor & Francis Journals, vol. 16(5), pages 469-473.
    • Handle: RePEc:taf:apeclt:v:16:y:2009:i:5:p:469-473
    DOI: 10.1080/13504850601018742
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    References listed on IDEAS

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    1. Franz, Wolfgang & Gordon, Robert J., 1993. "German and American wage and price dynamics : Differences and common themes," European Economic Review, Elsevier, vol. 37(4), pages 719-754, May.
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    3. Laurence Ball, 2000. "Near-rationality and inflation in two monetary regimes," Proceedings, Federal Reserve Bank of San Francisco.
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    5. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1329-1368.
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