The Natural Rate of Unemployment in Australia: Estimates From a Structural Var

Abstract

The concept of the natural rate of unemployment is widely used in the analysis and discussion of macroeconomic policy. It is, however, unobservable so that estimates of the natural rate are necessarily based on a particular theory of unemployment. Hence, measures of the natural rate, whether constant or time‐varying, are necessarily model‐dependent. Various series based on specific models have recently become available for Australia. We set out to compute a series for the natural rate based on a minimal theoretical structure captured by a two‐variable structural vector‐autoregressive (SVAR) model estimated using quarterly Australian data for the period 1978–1997. We assess the robustness of our estimates by varying both the theoretical restriction imposed on the model and the two variables included in the model. We find that the computed natural rate is quite sensitive to model specification, both in terms of the level and of the cyclical behaviour of the natural rate. We argue, however, that a particular variant of our model is strongly preferred to the others investigated. It produces an estimates natural rate series the behaviour of which is broadly consistent with that of series produced by others from more restrictive models.