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Productivity and the Natural Rate of Unemployment

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  • Jiri Slacalek

Abstract

I propose an econometric model that improves upon existing methods of estimating the natural rate of unemployment (NAIRU) by using information contained in the trend of productivity growth. My approach enhances the recently proposed model of Staiger, Stock and Watson (1997) in several respects. Statistically speaking, the method substantially shrinks the width of the 95% confidence interval, performs better in an out-of-sample inflation forecasting exercise, and is more robust to alternativestatistical assumptions. In economic terms, the productivity-augmented model generates a more realistic time profile of the NAIRU, and implies estimates of the Phillipscurve slope and the sacrifice ratio that are more in line with conventional wisdom. I also test whether the natural rate is correlated with the level or with the change of the productivity growth trend. I find support for the "level" hypothesis in both the US and international data.

Suggested Citation

  • Jiri Slacalek, 2004. "Productivity and the Natural Rate of Unemployment," Discussion Papers of DIW Berlin 461, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp461
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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.42776.de/dp461.pdf
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    References listed on IDEAS

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    1. Laurence Ball & Robert Moffitt, 2001. "Productivity Growth and the Phillips Curve," NBER Working Papers 8421, National Bureau of Economic Research, Inc.
    2. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
    3. Steven Braun, 1984. "Productivity and the NIIRU (and other Phillips curve issues)," Working Paper Series / Economic Activity Section 34, Board of Governors of the Federal Reserve System (U.S.).
    4. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
    5. Dale T. Mortensen & Christopher A. Pissarides, 1998. "Technological Progress, Job Creation and Job Destruction," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 733-753, October.
    6. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters,in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
    7. Philippe Aghion & Peter Howitt, 1994. "Growth and Unemployment," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 477-494.
    8. 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.
    9. 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.
    10. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information: A Model of Monetary Nonneutrality and Structural Slumps," Harvard Institute of Economic Research Working Papers 1941, Harvard - Institute of Economic Research.
    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(2), pages 297-346.
    12. N. Gregory Mankiw, 1994. "Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number greg94-1.
    13. Michael Woodford, 1994. "Structural Slumps," Journal of Economic Literature, American Economic Association, vol. 32(4), pages 1784-1815, December.
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    Cited by:

    1. Eric Heyer, 2010. "Efficacité de la politique économique et position dans le cycle: le cas de la défiscalisation des heures supplémentaires en France," Documents de Travail de l'OFCE 2010-26, Observatoire Francais des Conjonctures Economiques (OFCE).

    More about this item

    Keywords

    Natural rate of unemployment; Productivity; Phillips curve; Time-varying parameters; Kalman filter;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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