Inflation Rate Of Unemployment Research Articles

UNEMPLOYMENT HYSTERESIS IN MIDDLE-INCOME COUNTRIES

Business cycles pave the way for asymmetry in the unemployment rate behavior with rapid increases during recessions and slight decreases in expansions. It, in turn, may raise the non-accelerating inflation rate of unemployment and the cost in terms of inflation of any demand stimulus policy. The recent jump in unemployment worldwide due to the COVID-19 pandemic and the government’s stimulus package following it raises questions about the cost of such a decision. We use the smooth transition model (STR) to analyze unemployment dynamics on quarterly data over the last two decades for fifteen middle-income countries. Our results suggest the absence of hysteresis except for Bulgaria, Mexico, and Ukraine. Our policy recommendation for these countries is the necessity of labor market reforms, as hysteresis will considerably reduce any economic stimulus on unemployment.Keywords: Unemployment, hysteresis, STRJEL Classification: C10, J60

Assessing the Powell policy review

AbstractTo understand both how it controls inflation and how it trades off inflation with its goal of maximum employment, the Federal Reserve System uses a Keynesian framework in which monetary policy moves the unemployment rate relative to a presumed full employment value, termed the NAIRU (non‐accelerating inflation rate of unemployment). Because it does not know the value of the NAIRU, it pursues an expansionary monetary policy until inflation rises. This policy risks reviving the inflationary monetary policy of the 1970s.

How low can U go?

▀ Although there is growing evidence that wage growth is building in response to low and falling unemployment in the advanced economies, there is scope for unemployment rates to fall further without triggering a pay surge. ▀ For a start, current unemployment rates in comparison to past cyclical troughs overstate the tightness of labour markets. Demographic trends associated with the ageing ‘baby boomer’ bulge have pushed down the headline unemployment rate – unemployment rates among older workers are lower than those of younger cohorts. And in a historical context, Europe still has a large pool of involuntary part‐timers. ▀ In addition, rising participation rates mean that demographics are less of a constraint on employment growth than widely assumed. In both 2017 and 2018, had it not been for increased activity rates (mainly for older cohorts), unemployment would have had to fall more sharply to accommodate the same employment increase. We expect rising participation rates to continue to act as a pressure valve for the labour market. ▀ Finally, unemployment rates were generally far lower during the 1950s and 1960s than now. If wages stay low relative to productivity, as was the case during that prior era, employment growth may remain strong, with unemployment falling further. In the post‐war era, low wages were partly a function of a grand bargain in which policy‐makers provided full employment in return for low wage growth. ▀ There is evidence to suggest that many post‐crisis workers have opted for the security of their existing full‐time job and its associated benefits despite lower wage growth, rather than change job and potentially earn more; the rise of the ‘gig economy’ has led some workers to value what they already have more. Put another way, the non‐accelerating inflation rate of unemployment (NAIRU) has fallen. So, the role of labour market tightness in pushing wage growth higher may continue to surprise to the downside.

Why Has Australian Wages Growth Been So Low? A Phillips Curve Perspective

Wages growth in Australia has recently been the lowest in two decades. One possible explanation is a decline in the non‐accelerating inflation rate of unemployment (NAIRU). We examine this hypothesis by estimating a wage Phillips curve including a time‐varying NAIRU. Our findings are: (i) the NAIRU has recently been around 5.5 per cent; (ii) our approach increases the precision of the NAIRU estimates; (iii) low inflation expectations have been an important contributing factor; and (iv) the long‐run annual wages growth is nearly 3 per cent. We also find that the underutilisation rate suggests greater slack exists, but is less useful in explaining wage developments.

Measuring the US NAIRU as a step function

This paper reestimates the time-varying nonaccelerating inflation rate of unemployment (NAIRU) in the US. By assuming the NAIRU is a step function, not a smooth function, we show that a simple empirical model provides evidence supporting the consensus among macroeconomists that the US NAIRU was constant at about 6.0 % from the 1980s to the mid-1990s and then fell sharply below 6.0 % in the late 1990s.

Income from Speculative Financial Transactions will always Lead to Macro-Economic Instability

Starting with a macro-economic model based upon the NAIRU (the nonaccelerating inflation rate of unemployment), we show that, in a world with no (speculative) financial transactions, the macro- economy shows a stable equilibrium state. Including income from (speculative) financial transactions will lead to instability if the amount is sufficiently large. Considering the present amount of financial transactions, stability is impossible. Therefore, further financial crashes are not only likely but inevitable. Starting with a macro-economic model based upon the NAIRU (the nonaccelerating inflation rate of unemployment), we show that, in a world with no (speculative) financial transactions, the macro- economy shows a stable equilibrium state. Including income from (speculative) financial transactions will lead to instability if the amount is sufficiently large. Considering the present amount of financial transactions, stability is impossible. Therefore, further financial crashes are not only likely but inevitable.

The Fed is Ready to Raise Rates: Will Past be Prologue?

AbstractThe Fed is likely to commence hiking its policy rate in 2015. It is unlikely, however, that this rate‐hike cycle will feature a predictable 25 basis‐point rise at each and every meeting once it begins. Instead, the Fed will, I believe, opt to deliver a path of policy normalization even more gradual than the path it delivered in 2004–06. This will be owed, at least in part, to the difficulty it will confront in estimating the neutral policy rate with any precision, as well as to the fact that this cycle is likely to begin with an inflation rate that will have been running below its 2% target since that target was first announced in 2012. The Fed will nonetheless begin to hike because it is forecasting that inflation will rise as unemployment falls to – or even below – its estimate of the non‐accelerating inflation rate of unemployment (NAIRU). Because of the slowdown in the United States and global potential growth, however, as well as a persistent excess of global saving relative to desired investment opportunities, I expect that, for at least the next couple of years and likely for some time beyond, the neutral Fed policy rate consistent with mandate‐implied levels of unemployment and inflation will lie in the range of 2–3% in nominal terms, well below the pre‐crisis estimates of 4%.

Inference of the Trend in a Partially Linear Model with Locally Stationary Regressors

In this article, we construct the uniform confidence band (UCB) of nonparametric trend in a partially linear model with locally stationary regressors. A two-stage semiparametric regression is employed to estimate the trend function. Based on this estimate, we develop an invariance principle to construct the UCB of the trend function. The proposed methodology is used to estimate the Non-Accelerating Inflation Rate of Unemployment (NAIRU) in the Phillips Curve and to perform inference of the parameter based on its UCB. The empirical results strongly suggest that the U.S. NAIRU is time-varying.

Estimating the time-varying NAIRU and the Phillips curve slope simultaneously: a note

This article presents a new method for estimating the unobservable nonaccelerating inflation rate of unemployment (NAIRU). We improve upon the method employed in Ball and Mankiw (2002) so that (i) the new method can estimate simultaneously both the time-varying NAIRU and the Phillips curve slope and (ii) it can yield traditional constant NAIRU estimates as an extreme. As an empirical illustration, we estimate the time-varying US NAIRU with the moving block bootstrap confidence intervals.

The Estimation of Phillips Curve Equation with Triangle Model for Turkish Economy: 1998-2014

In this paper, the deflation puzzle in Turkey is examined for the period of 1998Q1- 2014Q1 using triangle model of inflation to forecast Phillips Curve. The NAIRU (non-accelerating inflation rate of unemployment) is added Phillips Curve Model by using three different methods which are Augmented Phillips Curve, Hodrick-Prescott Filter and Time Varying Parameters Model. According to the result of this paper, there is no deflation puzzle in Turkey for the period of 1998Q1- 2014Q1 and the triangle model of inflation is successfull to estimating inflation in Turkey.

The Comparison of in-sample Forecast Performance of Inflation with ARIMA and Phillips Curve Models for Turkey: 1995-2014

It is important for policymakers to forecast inflation correctly to struggle with it. There is a wide literature about forecasting inflation with minimum error created by central banks and economists. In this paper, the forecast performance of inflation with different tecniques are examined for the Turkish Economy for the period of 1995-2014. The forecast performance of different tecniques are evaluated by root mean square error, mean absolute error, mean absolute percent error and Theil U coefficient. The inflation forecasts are done by ARIMA, Augmented Phillips Curve, New Keynessien Phillips Curve and Triangle Model. The NAIRU (non-accelerating inflation rate of unemployment) variable in Triangle Model is produced by using two different methods which are Hodrick-Prescott Fitler and Time Varying Parameters.

Book Reviews

Carolin Pflueger of Harvard University reviews “Macroeconomics beyond the NAIRU” by Servaas Storm and C. W. M. Naastepad. The EconLit abstract of the reviewed work begins: Presents a critique of the nonaccelerating inflation rate of unemployment (NAIRU) theory and considers a new theoretical approach to growth, distribution, unemployment, and technological progress. Discusses the power of ideas; the weakness of the evidence; a growth model; the OECD Productivity Regime; OECD demand regimes; the generalization of the NAIRU theory; Europe's Nordic model; and macroeconomics beyond the NAIRU. Storm and Naastepad are Senior Lecturers in Economics at Delft University of Technology. Bibliography; index.

Do Flexible Labor Markets Indeed Reduce Unemployment? A Robustness Check

Nickell et al. (2005) have frequently been cited as empirical evidence that labor market rigidities cause high unemployment. We find that their model is not robust. Leaving their database unchanged and changing three details in their estimation procedure, it turns out that several policy-relevant coefficients change sign or significance. We conclude that their claim from Non Accelerating Inflation Rate of Unemployment (NAIRU) theory that labor market rigidities cause unemployment is rather shaky. There is a remarkable discrepancy between weak empirical results and sweeping conclusions by policy practitioners with respect to the call for deregulation of labor markets.

Regional Potential Outputs and Output Gaps in Korea

This paper analyzes whether economic growth of the Seoul Metropolitan Area (SMA) has a negative effect on other regional economies in Korea. The cause-effect relationship of economic growth between SMA and other regions in Korea (ROK) is analyzed with respect to regional potential outputs and output gaps. The regional potential output is derived from production function and NAIRU (Non-Accelerating Inflation Rate of Unemployment). The estimated results indicate that there are no significant cause-effect relationships on regional potential output between SMA and ROK. The output gaps, on the other hand, have a positive relationship between the two regions. The net population inflow to SMA increases the output gap of SMA and reduces the output gap of ROK.JEL Classification: R10, R58

HYSTERESIS AND THE REGIONAL NAIRUs IN ITALY

This paper investigates the determinants of regional unemployment disparities in Italy. Relying on panel unit root tests and data over the 1977–2003 years, we reject the hysteresis hypothesis and then proceed to estimate the non-accelerating inflation rate of unemployment (NAIRU) for each of the 20 Italian regions. Our estimates of the regional NAIRUs turn out to be fairly precise and allow us to draw two interesting conclusions. First, the hypothesis of constant regional NAIRUs between 1977 and 2003 is supported by the data. Second, we find that there is a significant degree of heterogeneity among the regional NAIRUs.

The NAIRU reconsidered: why labour market deregulation may raise unemployment

According to the mainstream theory of equilibrium unemployment, persistent unemployment is caused mainly by ‘excessive’ labour market regulation, whereas aggregate demand, capital accumulation and technological progress have no lasting effect on unemployment. We show that the mainstream non‐accelerating inflation rate of unemployment (NAIRU) model is a special case of a general model of equilibrium unemployment, in which aggregate demand, investment and endogenous technological progress do have long‐term effects. It follows that labour market deregulation does not necessarily reduce steady‐inflation unemployment. Theoretically, if the decline in real wage growth claims owing to deregulation is smaller than the ensuing decline in labour productivity growth and in the warranted real wage growth, then in that case steady‐inflation unemployment may increase. Empirical evidence for 20 Organisation for Economic Cooperation and Development (OECD) countries (1984–1997) indicates that the impact of labour market deregulation on OECD unemployment is zero, and possibly negative (causing a higher rate of unemployment).

IS THE NAIRU THEORY A MONETARIST, NEW KEYNESIAN, POST KEYNESIAN OR A MARXIST THEORY?

ABSTRACTThe NAIRU (non‐accelerating inflation rate of unemployment) theory has become the mainstream theory in explaining unemployment in Europe and is often used to justify demands for a cutback of the welfare state, such as reducing unemployment benefits. Close inspection reveals that it, perhaps surprisingly, shares some arguments with Post Keynesian and even Marxist theory. The paper proposes an underdetermined, encompassing NAIRU model, which is consistent with several theoretical traditions. Depending on the closure with respect to demand formation and determination of the NAIRU itself, the model allows for New Keynesian, Post Keynesian and Marxist results.

Can Productivity Growth Explain the NAIRU? Long‐Run Evidence from Britain, 1871–1999

This paper investigates the effect of productivity growth on the non‐accelerating inflation rate of unemployment (NAIRU) over the long run, using historically consistent time series for the UK from 1871 to 1999. A two‐equation model of unemployment and wage‐setting that incorporates productivity effects is estimated over the whole period, allowing for shifts associated with changes in labour market institutions. The results indicate that faster productivity growth reduces the NAIRU, but that this goes only part of the way towards explaining wide swings in average unemployment across the decades.

Nonlinearities and Fractional Integration in the US Unemployment Rate*

AbstractThis paper proposes a model of the US unemployment rate which accounts for both its asymmetry and its long memory. Our approach introduces fractional integration and nonlinearities simultaneously into the same framework, using a Lagrange multiplier procedure with a standard null‐limit distribution. The empirical results suggest that the US unemployment rate can be specified in terms of a fractionally integrated process, which interacts with some nonlinear functions of labour‐demand variables such as real oil prices and real interest rates. We also find evidence of a long‐memory component. Our results are consistent with a hysteresis model with path dependency rather than a non‐accelerating inflation rate of unemployment (NAIRU) model with an underlying unemployment equilibrium rate, thereby giving support to more activist stabilization policies. However, any suitable model should also include business cycle asymmetries, with implications for both forecasting and policy‐making.

Whatever Happened to Goldilocks? The Role of Expectations in Estimates of the NAIRU in the US and the UK*

AbstractDuring the second half of the 1990s the US economy was characterized as the Goldilocks economy: not too hot, nor too cold, but just right. It was argued that this represented a new paradigm, enabling unemployment to remain low without igniting inflationary pressure. We examine the evidence for a change in the relationship between inflation and unemployment for the US and UK using Phillips curve models. The impact of including explicit inflation expectations is also considered. Inflation expectations are found to play an important role, particularly in the US. When expectations are included there is still evidence that the non‐accelerating inflation rate of unemployment (NAIRU) steadily declined during the late 1990s, although this decline in the US NAIRU is not found solely in the 1990s.