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What goes down must come up: understanding time-variation in the NAIRU

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  • Evan F. Koenig

Abstract

The behavior of inflation during the 1990s is consistent with the predictions of a model that assumes a constant long-run NAIRU and a constant long-run markup of output prices over unit labor costs. Within this framework, inflation fell during the late 1990s - despite low unemployment - chiefly because an unusually high markup allowed firms to increase wages without raising prices. As the markup returns to normal, the recent unusually favorable unemployment -inflation trade-off can be expected to deteriorate. More generally, movements in the markup induce persistent but ultimately temporary variation in the NAIRU.

Suggested Citation

  • Evan F. Koenig, 2001. "What goes down must come up: understanding time-variation in the NAIRU," Working Papers 0101, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddwp:0101
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    File URL: http://dallasfed.org/assets/documents/research/papers/2001/wp0101.pdf
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    References listed on IDEAS

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    Cited by:

    1. Michael T. Owyang & Abbigail J. Chiodo, 2002. "Duration dependence in monetary policy: international evidence," Working Papers 2002-021, Federal Reserve Bank of St. Louis.

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    Keywords

    Inflation (Finance) ; Unemployment;

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