In Search of the Natural Rate of Unemployment

Abstract

We use a structural-VAR model to estimate the steady-state rate of unemployment, which we define as the natural rate. Although nothing constrains it to do so, the natural rate measured by this approach implies a strong negative relationship between cyclical unemployment and inflation, adding to the empirical evidence for a short-run Phillips Curve. Meanwhile, the natural rate appears to be more volatile than previous estimates and, indeed, accounts for the bulk of the variation in the U.S. unemployment rate over the past 50 years. Much of the variation in the natural rate can be related to structural factors consistent with search-based equilibrium models of employment.