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

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  • Arabinda Basistha

    (West Virginia University)

  • Richard Startz

    (University of Washington)

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 and gives a 33% reduction in the confidence band. The inclusion of an Okun's Law relation is particularly valuable. The essential notion is the existence of a common cyclical force driving the macroeconomic variables. Model comparisons based on the use of Bayes factors favor the idea of a common cyclical component. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Arabinda Basistha & Richard Startz, 2008. "Measuring the NAIRU with Reduced Uncertainty: A Multiple-Indicator Common-Cycle Approach," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 805-811, November.
  • Handle: RePEc:tpr:restat:v:90:y:2008:i:4:p:805-811
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    Cited by:

    1. Guillén, Osmani Teixeira & Hecq, Alain & Issler, João Victor & Saraiva, Diogo, 2015. "Forecasting multivariate time series under present-value model short- and long-run co-movement restrictions," International Journal of Forecasting, Elsevier, pages 862-875.
    2. Sven Schreiber, 2012. "Estimating the natural rate of unemployment in euro-area countries with co-integrated systems," Applied Economics, Taylor & Francis Journals, vol. 44(10), pages 1315-1335, April.
    3. Lenza, Michele & Jarociński, Marek, 2016. "An inflation-predicting measure of the output gap in the euro area," Working Paper Series 1966, European Central Bank.
    4. Kajuth, Florian, 2012. "Identifying the Phillips curve through shifts in volatility," Journal of Macroeconomics, Elsevier, pages 975-991.
    5. Juan Antolin-Diaz & Thomas Drechsel & Ivan Petrella, 2017. "Tracking the Slowdown in Long-Run GDP Growth," The Review of Economics and Statistics, MIT Press, pages 343-356.
    6. Hasenzagl, Thomas & Pellegrino, Filippo & Reichlin, Lucrezia & Ricco, Giovanni, 2017. "A Model of the Fed’s View on Inflation," The Warwick Economics Research Paper Series (TWERPS) 1145, University of Warwick, Department of Economics.
    7. De la Serve, M-E. & Lemoine, M., 2011. "Measuring the NAIRU: a complementary approach," Working papers 342, Banque de France.
    8. Antolin-Diaz, Juan & Drechsel, Thomas & Petrella, Ivan, 2014. "Following the Trend: Tracking GDP when Long-Run Growth is Uncertain," CEPR Discussion Papers 10272, C.E.P.R. Discussion Papers.
    9. Neri, Marcelo Cortes, 2014. "Brazil's middle classes," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 759, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    10. Xiaoshan Chen & Terence Mills, 2012. "Measuring the Euro area output gap using a multivariate unobserved components model containing phase shifts," Empirical Economics, Springer, pages 671-692.
    11. Dave Reifschneider & William Wascher & David Wilcox, 2015. "Aggregate Supply in the United States: Recent Developments and Implications for the Conduct of Monetary Policy," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(1), pages 71-109, May.
    12. Xiaoshan Chen & Ronald MacDonald, 2010. "Revisiting the Dollar-Euro Permanent Equilibrium Exchange Rate: Evidence from Multivariate Unobserved Components Models," Working Papers 2010_16, Business School - Economics, University of Glasgow.
    13. Zhang, Chengsi & Murasawa, Yasutomo, 2011. "Output gap measurement and the New Keynesian Phillips curve for China," Economic Modelling, Elsevier, vol. 28(6), pages 2462-2468.
    14. Gumbau-Brisa, Fabia & Olivei, Giovanni P., 2013. "An evaluation of the Federal Reserve estimates of the natural rate of unemployment in real time," Working Papers 13-24, Federal Reserve Bank of Boston.
    15. Yasutomo Murasawa, 2014. "Measuring the natural rates, gaps, and deviation cycles," Empirical Economics, Springer, pages 495-522.
    16. Malikane, Christopher, 2014. "Traditional Inflation Dynamics," MPRA Paper 61427, University Library of Munich, Germany.
    17. James Morley, 2014. "Measuring Economic Slack: A Forecast-Based Approach with Applications to Economies in Asia and the Pacific," BIS Working Papers 451, Bank for International Settlements.
    18. Speigner, Bradley, 2014. "Long-term unemployment and convexity in the Phillips curve," Bank of England working papers 519, Bank of England.
    19. Tucker S. McElroy & Thomas M. Trimbur, 2012. "Signal extraction for nonstationary multivariate time series with illustrations for trend inflation," Finance and Economics Discussion Series 2012-45, Board of Governors of the Federal Reserve System (U.S.).
    20. Machado, Vicente da Gama & Portugal, Marcelo Savino, 2014. "Measuring inflation persistence in Brazil using a multivariate model," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).

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