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

The low unemployment/low inflation environment of the 1990s has spawned a resurgence of interest in the economy's natural rate of unemployment. This paper develops time-varying natural rate estimates by using the Okun's Law relationship between employment and output. The estimates are robust to alternative measures of the business cycle, and differ qualitatively and quantitatively from estimates of the NAIRU, which are typically backed out of a reduced-form Phillips curve. Despite these differences, natural rate estimates display similar utility in forecasting inflation as NAIRU estimates derived from the past history of inflation itself.