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The European Commission's new NAIRU: Does it deliver?

Author

Listed:
  • Sebastian Gechert
  • Katja Rietzler
  • Silke Tober

Abstract

The non-accelerating inflation rate of unemployment (NAIRU) is a key component of potential output and as such critically affects output gap estimates. In May 2014, the European Commission changed its specification of the NAIRU for several countries and lowered its NAIRU estimates - in the case of Spain from 26.6% to 20.7% for 2015. To test the dependence of the new NAIRU on unemployment versus structural factors, we run counterfactual simulations applying 1SD shocks to actual unemployment and to the structural variable - real unit labour costs. We find that the NAIRU in its new specification is still largely determined by actual unemployment. This calls in question both the interpretation of potential output estimates as barriers to more vigorous inflation-stable economic activity and the accuracy of structural deficit figures.

Suggested Citation

  • Sebastian Gechert & Katja Rietzler & Silke Tober, 2016. "The European Commission's new NAIRU: Does it deliver?," Applied Economics Letters, Taylor & Francis Journals, vol. 23(1), pages 6-10, January.
    • Handle: RePEc:taf:apeclt:v:23:y:2016:i:1:p:6-10
    DOI: 10.1080/13504851.2015.1044641
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    Cited by:

    1. Xavier Timbeau, 2015. "A diverging Europe on the edge. The independent Annual Growth Survey 2015," Sciences Po Economics Publications (main) hal-03620048, HAL.
    2. Sebastian Gechert & Ansgar Rannenberg, 2015. "The Costs of Greece's Fiscal Consolidation," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 84(3), pages 47-59.
    3. M. Deroose & A. Rannenberg & J. Wauters, 2019. "Separating the trend from the cycle : The debate on euro area potential output and implications for monetary policy," Economic Review, National Bank of Belgium, issue ii, pages 7-28, September.
    4. Alessandro Cianci, 2016. "Disoccupazione strutturale in Italia e regole europee di bilancio," a/ Working Papers Series 1601, Italian Association for the Study of Economic Asymmetries, Rome (Italy).
    5. Fabrice Orlandi & Werner Roeger & Anna Thum-Thysen, 2018. "The Return of the European Wage Phillips Curve," European Economy - Discussion Papers 085, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    6. repec:spo:wpmain:info:hdl:2441/4s2r6d8kua98d9veu2un1vm9vh is not listed on IDEAS
    7. Silke Tober, 2015. "Monetary Financing in the Euro Area: A Free Lunch?," IMK Working Paper 152-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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