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The NAICU and the Phillips curve – An Approach Based on Micro Data

In this paper we propose a straightforward method to derive a non-accelerating inflation capacity utilisation rate (NAICU) based on micro data. We condition the current capacity utilisation of firms on their current and planned price adjustments. The non-accelerating inflation capacity utilisation rate is then defined as the rate where a firm feels no price adjustment pressure. One of the main advantages is that this methodology uses structural aspects and does not make it necessary to operate with –often rather arbitrary– statistical filters. We show that our aggregate NAICU performs remarkably well as an indicator of inflationary pressure in a Phillips curve estimation.

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Paper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 08-211.

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Length: 25 pages
Date of creation: Nov 2008
Date of revision:
Handle: RePEc:kof:wpskof:08-211
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  1. Laurence Ball & N. Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Harvard Institute of Economic Research Working Papers 1963, Harvard - Institute of Economic Research.
  2. Basistha, Arabinda & Nelson, Charles R., 2007. "New measures of the output gap based on the forward-looking new Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 498-511, March.
  3. Arturo Estrella & Frederic Mishkin, 1998. "Rethinking the role of NAIRU in monetary policy: implications of model formulation and uncertainty," Research Paper 9806, Federal Reserve Bank of New York.
  4. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
  5. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
  6. 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.
  7. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  8. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270.
  9. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
  10. Athanasios Orphanides & John C. Williams, 2004. "The decline of activist stabilization policy: natural rate misperceptions, learning, and expectations," International Finance Discussion Papers 804, Board of Governors of the Federal Reserve System (U.S.).
  11. Katharine Neiss & Edward Nelson, 2002. "Inflation dynamics, marginal cost, and the output gap: evidence from three countries," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  12. Nicoletta Batini & Jennifer Greenslade, 2003. "Measuring The UK Short-Run NAIRU," Discussion Papers 12, Monetary Policy Committee Unit, Bank of England.
  13. King, Thomas B. & Morley, James, 2007. "In search of the natural rate of unemployment," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 550-564, March.
  14. Carol Corrado & Joe Mattey, 1997. "Capacity Utilization," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 151-167, Winter.
  15. Sarah M. Rupprecht, 2007. "When Do Firms Adjust Prices? Evidence from Micro Panel Data," KOF Working papers 07-160, KOF Swiss Economic Institute, ETH Zurich.
  16. Camarero, Mariam & Carrion-i-Silvestre, Josep Lluis & Tamarit, Cecilio, 2005. "Unemployment dynamics and NAIRU estimates for accession countries: A univariate approach," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 584-603, September.
  17. 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.
  18. Jordi Gali, 2002. "New Perspectives on Monetary Policy, Inflation, and the Business Cycle," NBER Working Papers 8767, National Bureau of Economic Research, Inc.
  19. Niek Nahuis, 2003. "An alternative demand indicator: the 'non-accelerating inflation rate of capacity utilization'," Applied Economics, Taylor & Francis Journals, vol. 35(11), pages 1339-1344.
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