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

Abstract

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, what these policies do in short term is reduce the unemployment rate temporarily and in long run is increasing inflation. [Z1]Vague conclusion