Measuring Uncertainty of the Euro Area NAIRU: Monte Carlo and Empirical Evidence for Alternative Confidence Intervals in a State Space Framework

Abstract

This paper investigates uncertainty around point estimates of the euro area NAIRU in a state space framework. The relative accuracy of alternative measures of uncertainty for state space models are compared using Monte Carlo simulations. A direct bootstrap method yields confidence intervals with lower coverage probability than confidence intervals based on MSE approximations. The degree of uncertainty of the euro area NAIRU is estimated with a trivariate state space model. The widths of the alternative confidence intervals differ to some extent, and the direct bootstrap method shows the narrowest confidence interval. However, even the wider intervals based on MSE approximations are narrow enough for the identification of significant differences between observed unemployment and the NAIRU.