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U.S. natural rate dynamics reconsidered

Several features of the U.S. natural rate of unemployment are reconsidered through specification and testing of econometric models. Traditionally, the choice has been between a wage Phillips curve model, PCM, or an equilibrium correction wage curve model, WECM. The models proposed in this paper feature extended equilibrium correction which reduces the consequences for natural rate dynamics of choosing between wage models. In order for the difference between PCM and WECM to become important, the extended equilibrium correction mechanism must be ‘switched off’ by restrictions. These restrictions are rejected when tested. The analysis supports the original view that natural rates depend on the macroeconomic system, rather than just the wage Phillips curve. The analysis indicates a reduction of the natural rate in the course of the 1990s, due to low worker bargaining power and other structural changes. The estimated reduction is approximately 0.5 0.8 percentage points, which is less than existing results based on Phillips curve estimation.

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File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2006/Memo-13-2006.pdf
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Paper provided by Oslo University, Department of Economics in its series Memorandum with number 13/2006.

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Length: 28 pages
Date of creation: 09 May 2006
Date of revision:
Handle: RePEc:hhs:osloec:2006_013
Contact details of provider: Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
Web page: http://www.oekonomi.uio.no/indexe.html
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