Time-varying estimates of the natural rate of unemployment: a revisitation of Okun's law (original) (raw)

Is the NAIRU more useful in forecasting inflation than the natural rate of unemployment?

2006

Recent studies have indicated that the terms 'NAIRU'(non-accelerating inflation rate of unemployment) and 'natural rate of unemployment'are not interchangeable. While NAIRU is an empirical macroeconomic relationship estimated via a Phillips curve, the natural rate is an equilibrium condition in the labour market, reflecting the market's microeconomic features. This study evaluates comparatively the inflation-forecasting power of alternative time-varying estimates of the natural rate of unemployment relative to the NAIRU.

The natural rate of unemployment, its estimation, and evaluation of its estimators

2000

This dissertation estimates a time series of the natural rate of unemployment via competing methods, and evaluates such methods both within sample and for forecasting purposes. The methods used include the Kalman and Hodrick-Prescott filters. Evaluation proceeds along two lines. First, a Phillips curve is used in order to assess how well deviations of actual inflation from expected inflation are explained by deviations of the actual unemployment rate from estimated natural rates within a given sample period. The evaluative criterion is the overall fit of each regression. The analysis indicates that the in-sample fit of the Phillips curve changes little when different estimators of the natural rate of unemployment are considered. However, incorporating the 12-month-ahead forecast of inflation given by the Livingston survey improves the overall fit of the curve. Beyond the within-sample overall fit of a Phillips curve, analysis is conducted in order to assess the usefulness of various estimators of the natural rate for purposes of forecasting and policy-making. In order to test “out-of-sample,” recursive least squares is used in a Phillips curve context in order to estimate the natural rate and generate a corresponding forecast of inflation for next period. Additionally, estimates of the natural rate derived from a Kalman filter, the Hodrick-Prescott filter, and a method incorporating structural determinants of unemployment are included in a Phillips curve in order to generate a forecast of one-period-ahead inflation. Despite earlier results regarding the Livingston survey information, the analysis does not indicate that the Livingston survey information can aid policymakers in forecasting inflation. Further, even though the most common method of estimating natural rates is via a Phillips curve, the Phillips curve method of estimating the natural rate of unemployment does not appear superior–in terms of its forecasting power–to other methods of estimating the natural rate when the Phillips curve is utilized as the forecasting equation. Slight evidence is provided in support of the Hodrick-Prescott filter as an estimator of the natural rate of unemployment. Both the Kalman and Hodrick-Prescott filters feature the benefit of requiring only one series of data, and the Kalman approach is quite parsimonious.

The Business Cycle, Inflation, and Unemployment Rate Nexus: An Empirical Approach

International Journal of Economics and Finance, 2021

This paper revisits the main assumption regarding the original Phillips curve regarding the American economy, in which one assumes that the unemployment rate causes an inflation rate. In this context, this paper aims to evaluate if the variance of the inflation rate affects the unemployment rate and, besides, if there is a one-way causality from the variance of the inflation rate to the unemployment rate. Based on quarterly time series from 1959:04 to 2019:04 the empirical results show, via OLS and GMM methods, that the monetary policy affects the business cycle, and, in turn, the business cycle impacts the unemployment rate. Hence, the monetary policy affects indirectly the unemployment rate via the business cycle. On the other hand, the variance of the inflation rate contributes to an increase in the unemployment rate, consequently, there isn’t a trade-off between the unemployment rate and the variance of the inflation rate. Moreover, there is a one-way causality from the variance...

The Time-Varying NAIRU and its Implications for Economic Policy

Journal of Economic Perspectives, 1997

The NAIRU, the unemployment rate consistent with a constant rate of inflation, is estimated, in this paper, as a parameter allowed to vary over time. Value is determined in an econometric model where the inflation rate depends on its past values, demand and supply shocks. The NAIRU estimated for the GDP deflator varies over the past forty years within 5.4 to 6.5 percent; its estimated value for the most recent quarter (1996:Q2) is 5.6 percent. The NAIRU has declined in recent years in response to global competition, immigration, other factors weakening labor's bargaining position, and the rapidly declining prices of computers and other electronics.

The Natural Rate of Unemployment and its Implications for Economic Policy

2011

The analysis of the inflation-unemployment tradeoff has undergone several stages during the post-war era. The first was marked by the acceptance of A.W. Phillips’ 1957 hypothesis and the subsequent Phillips curve. The next stage – marked by Friedman’s contributions – revealed a vertical long-run Phillips curve and introduced the natural rate of unemployment, designating that level of unemployment consistent with

Examining the Nexus between Inflation and Unemployment (NAIRU Estimation) in Iran

iranian economic review, 2020

T his paper aims to estimate Iran’s time-varying Non-Accelerating Inflation Rate of Unemployment (NAIRU) over the period 1986–2018. The NAIRU is estimated step by step starting with the constant NAIRU and then the time-varying NAIRU. The time-varying NAIRU is estimated by the Kalman filter and is compared to HP filter estimates. This model relies on the standard “triangle model” approach that includes various measures of supply and demand shocks in the specification of the Phillips curve. Results show that the NAIRU has been raised during the period, and according to the econometric results, there is a structural unemployment gap in the long-run, and the actual unemployment rate is approaching full employment[Z1] . In other words, there is not any significant gap between the actual unemployment rate and the estimated one (NAIRU). It shows that the high rate of unemployment is related to the structural elements and cannot be reduced by exerting monetary policies in long run. However,...