IDEAS home Printed from https://ideas.repec.org/p/rbp/wpaper/dt-2026-001.html

Seen and Unseen: NAIRU, informal labor market and talking points for monetary policy

Author

Listed:
  • César Carrera

    (Banco Central de Reserva del Perú)

  • Marko Razzo

    (Banco Central de Reserva del Perú)

Abstract

This paper examines how labor-market informality alters the estimation and policy interpretation of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) in an emerging-market context. Using quarterly Peruvian data from 2007 to 2024, we estimate a time-varying parameter unobserved-components model with stochastic volatility following Chan, Koop, and Potter (2016). Bayesian MCMC techniques jointly recover trend inflation, the NAIRU, and the Phillips-curve slope under two alternative measures of slack: the standard unemployment rate and an extended measure incorporating informal workers. The conventional specification implies a rising NAIRU and persistent inflationary pressure. In contrast, the informality-adjusted NAIRU declines, and the Phillips-curve slope flattens, indicating that informal employment absorbs slack and dampens inflationary dynamics. These results suggest that ignoring informality overstates inflation risks and the power of monetary policy, with significant implications for inflation-targeting frameworks in economies with large informal sectors.

Suggested Citation

  • César Carrera & Marko Razzo, 2026. "Seen and Unseen: NAIRU, informal labor market and talking points for monetary policy," Working Papers 2026-001, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:dt-2026-001
    as

    Download full text from publisher

    File URL: https://investigacion.bcrp.gob.pe/en/research/working-papers/dt-2026/wp-2026-001
    File Function: application/pdf
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rbp:wpaper:dt-2026-001. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Research Unit (email available below). General contact details of provider: https://edirc.repec.org/data/bcrgvpe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.