NAIRU Research Articles

A Multivariate Filter for Measuring Potential Output and the NAIRU Application to the Czech Republic

This paper presents a multivariate (MV) methodology for obtaining measures of excess demand that can facilitate discussion of monetary policy issues and improve policy decisions. Using data for the Czech Republic, a growing economy undergoing major structural change, it shows how the use of more information to condition the paths of potential output and the non accelerating inflation rate of unemployment (NAIRU) improves on univariate methods as the Hodrick-Prescott (HP) filter.

Do Minimum Wages Raise the NAIRU?

Abstract Maybe a lot. The ratio of the minimum wage to the average wage enters a Phillips-curve equation with a coefficient that is highly significant, stable, and robust. One interpretation of these results is that the relative level of the minimum wage affects the Non-Accelerating Inflation Rate of Unemployment or NAIRU. My estimates are consistent with the reduction in the relative level of the minimum wage since 1980 lowering the U.S. NAIRU about 1½ percentage points, while raising the NAIRU in continental Europe. However, other interpretations are also possible.

Die NAIRU – eine post-keynesianische Interpretation

In this paper the New Keynesian long run equilibrium view of a non-accelerating-inflation-rate-of-unemployment (NAIRU) determined by structural characteristics of the labour market, wage bargaining institutions and social benefit systems is challenged by a Post-Keynesian view. In a Post-Keynesian model the NAIRU can only be interpreted as a short run barrier to employment arising from inflation fuelled by distribution conflict, which is enforced by monetary policies. In the long run, the development of the NAIRU follows actual unemployment and hence effective demand. Different adjustment channels are identified. It is also shown that effective coordination of wage bargaining is a better means to stabilise inflation rates and employment than monetary policies.

The NAIRU, unemployment and the rate of inflation in Brazil

This paper estimates the Brazilian NAIRU (Nonaccelerating Inflation Rate of Unemployment) and investigates several empirical questions: the stability of coefficients of the Brazilian price Phillips curve, the behavior of the NAIRU along time, and error bands for the NAIRU. This article innovates, with respect to previous research work done for Brazil, because it estimates error bands for the NAIRU and adopts econometric models that, in our judgment, deal more adequately with the still recent instability of the Brazilian economy. We estimate two different state-space models: one with a time-varying NAIRU and another in which the NAIRU is changing over time according to a hidden Markov chain specification. The study presents some new evidence on several questions. It shows that while the slope of the Brazilian price Phillips curve is stable the NAIRU has not been stable. It concludes that there is a statistically significant relationship, with correct sign, between deviations of unemployment from the NAIRU and inflation. It also shows that, after the second semester of 1995, there is no significant evidence that the NAIRU has been different from the observed unemployment rate.

Will the (German) NAIRU Please Stand up?

This paper deals with a critical assessment and a reestimation of the non-accelerating inflation rate of unemployment (NAIRU) for Germany. There are quite a few obstacles to perceiving the NAIRU as an understandable and easy-to-use analytical instrument, suitable for economic policy: the possibility of a non-vertical Phillips curve (e.g. in times of low inflation), the occurrence of shocks and hysteresis effects, the (mis-)measurement of important variables such as in inflation expectations, cointegration issues, and a time variability of the NAIRU and its confidence intervals. Despite many serious caveats a new attempt is made to estimate a NAIRU for Germany based on conventional Phillips curves as well as on new approaches such as using direct measures of inflationary expectations, the Kalman filter method, and the residual-based bootstrap procedure (in order to estimate confidence intervals). However, by any method, simple or complex, the NAIRU is very hard to determine and subject to considerable arbitrariness.

The Roaring Nineties: Can Full Employment Be Sustained? Edited by Alan B. Krueger and Robert Solow. New York: The Russell Sage Foundation and the Century Foundation Press, 2001. Pp. xlvi, 592. $49.95.

The 1990s, particularly the last half of the decade, presented a special challenge to the conventional wisdom. Few would have asserted that unemployment could be pushed much below (or possibly even to) 5.5 or 6.0 percent without an unacceptable acceleration in the rate of price inflation. This consensus came from the acceptance of the Phillips curve and the NAIRU (nonaccelerating inflation rate of unemployment), and so ingrained was this orthodoxy that most policymakers accepted it. Is the NAIRU dead?The Russell Sage Foundation and the Century Foundation believed that the 1990s required a closer examination to see what we could learn from this seemingly unusual period. They asked Robert Solow and Alan Krueger to assemble the set of topics and authors that resulted in this volume. The book is divided into four parts.

The NAIRU in Theory and Practice

This paper discusses the NAIRU -- the non-accelerating inflation rate of unemployment. It first considers the role of the NAIRU concept in business cycle theory, arguing that this concept is implicit in any model in which monetary policy influences both inflation and unemployment. The exact value of the NAIRU is hard to measure, however, in part because it changes over time. The paper then discusses why the NAIRU changes and, in particular, why it fell in the United States during the 1990s. The most promising hypothesis is that the decline in the NAIRU is attributable to the acceleration in productivity growth.

The NAIRU in Theory and Practice

This paper discusses the NAIRU—the non-accelerating inflation rate of unemployment. It first considers the role of the NAIRU concept in business cycle theory, arguing that this concept is implicit in any model in which monetary policy influences both inflation and unemployment. The exact value of the NAIRU is hard to measure, however, in part because it changes over time. The paper then discusses why the NAIRU changes and, in particular, why it fell in the United States during the 1990s. The most promising hypothesis is that the decline in the NAIRU is attributable to the acceleration in productivity growth.

The NAIRU, Aggregate Demand and Investment

The nature of the non‐accelerating inflation rate of unemployment (NAIRU) is analysed. The focus of our analysis is the role of aggregate demand and capacity in the context of the NAIRU. Two aspects of the relationship between the level of aggregate demand and the NAIRU are of particular significance. First, it is argued that the real wage–employment relationship based on enterprise decisions cannot be fully articulated without reference to the level of aggregate demand. Second, a model which allows for variable returns to labour and the notion of full capacity is used to explore the effects of shifts in the capital stock on the real wage–employment relationship. The model is specifically used to explore whether a sufficiently expansionary environment can generate sufficient investment to shift that relationship until the NAIRU is compatible with full employment. A number of limitations on the conclusions reached are considered, and the policy implications are briefly considered.

Are Phillips Curves Useful for Forecasting Inflation?

This study evaluates the conventional wisdom that modern Phillips curve-based models are useful tools for forecasting inflation. These models are based on the non-accelerating inflation rate of unemployment (the NAIRU). The study compares the accuracy, over the last 15 years, of three sets of inflation forecasts from NAIRU models to the naive forecast that at any date inflation will be the same over the next year as it has been over the last year. The conventional wisdom is wrong; none of the NAIRU forecasts is more accurate than the naive forecast. The likelihood of accurately predicting a change in the inflation rate from these three forecasts is no better than the likelihood of accurately predicting a change based on a coin flip. The forecasts include those from a textbook NAIRU model, those from two models similar to Stock and Watson’s, and those produced by the Federal Reserve Board.

Neues von der NAIRU? / News from the NAIRU?

Zusammenfassung Der Beitrag enthält eine Neuschätzung der inflationsstabilen Arbeitslosenquote (NAIRU) für Westdeutschland 1980 bis 1998. Nach einer Darstellung des konzeptionellen Rahmens der NAIRU einschließlich verschiedener Varianten, welche beispielsweise exogenen Schocks und dem Hysterese-Phänomen Rechnung tragen, erfolgt eine Diskussion verschiedener methodischer Probleme. Erstmalig werden für Westdeutschland dann eine zeitvariable NAIRU mit Hilfe des Kaiman-Verfahrens sowie dazugehörige Konfidenzbänder unter Verwendung der residualbasierten Bootstrap-Methode geschätzt. Demnach liegt die westdeutsche NAIRU Ende des Jahres 1998 im Intervall zwischen 7.9 und 8.5 v. H. Zahlreiche methodische Vorbehalte sprechen indes dafür, diese und andere NAIRU Schätzungen mit Vorsicht zu interpretieren.

Mean reversion of inflation rates: Evidence from 13 OECD countries

The stationarity of inflation has several important economic implications. This paper applies two recently developed panel unit root tests to re-examine the stationarity of inflation rates in 13 OECD countries. We provide strong empirical evidence to support the mean reversion of inflation rates. Our finding fails to support the accelerationist hypothesis and it also points out that the conventional cointegration approach in analyzing the Fisher effect and the convergence of inflation rates may not be appropriate.

Forme ridotte e modelli incompleti nell'analisi di cointegrazione: il caso del NAIRU

This paper explores the problems arising when the reduced form cointegrating vectors are obtained from an incomplete VAR with omitted endogenous variables. It is shown that an incomplete VAR model, based on variables of the long-run reduced forms, produces an approximation of the cointegrating vectors coefficients and the misspecification of the short-run dynamics. It is also shown that this problems do not arise in certain circumstances. An example concerning the estimation of the NAIRU is provided suggesting the empirical relevance of our criticism.

Do Minimum Wages Raise the NAIRU?

A high minimum wage (relative to average wages) raises nominal wage growth and hence inflation. This effect can be offset by extra unemployment; so the minimum wage increases the Non-Accelerating Inflation Rate of Unemployment or NAIRU. This effect is clearly discernible and robust to variations in model specification and sample period. It is consistent with international comparisons and the behavior of prices. I estimate that the reduction in the relative level of the minimum wage over the last two decades accounts for a reduction in the NAIRU of about 1 1/2 percentage points. It can also account for the substantial reduction in the NAIRU in the United States relative to continental Europe.

Has Greater Competition Restrained U.S. Inflation?

This paper shows how increased goods market competition affects the behavior of inflation in a multisector economy. By raising the price elasticity of demand, increased goods market competition theoretically lowers inflation and makes the aggregate price level less sensitive to aggregate demand shocks. We find that proxies for the aggregate degree of goods market competition are statistically and economically significant in short‐run Phillips curve models of core inflation. Evidence indicates that heightened goods market competition has flattened the slope of the short‐run, expectations‐augmented Phillips curve and slightly lowered the nonaccelerating inflation rate of unemployment (NAIRU).

Has Greater Competition Restrained U. S. Inflation?

This paper shows how increased goods market competition affects the behavior of inflation in a multisector economy. By raising the price elasticity of demand, increased goods market competition theoretically lowers inflation and makes the aggregate price level less sensitive to aggregate demand shocks. We find that proxies for the aggregate degree of goods market competition are statistically and economically significant in short-run Phillips curve models of core inflation. Evidence indicates that heightened goods market competition has flattened the slope of the short-run, expectations-augmented Phillips curve and slightly lowered the nonaccelerating inflation rate of unemployment (NAIRU).

Near-Rational Wage and Price Setting and the Long-Run Phillips Curve

OVER THIRTY YEARS ago, in his presidential address to the American Economic Association, Milton Friedman asserted that in the long run the Phillips curve was vertical at a natural rate of unemployment that could be identified by the behavior of inflation.(1) Unemployment below the natural rate would generate accelerating inflation, and unemployment above it, accelerating deflation. Five years later the New Classical economists posed a further challenge to the stabilization orthodoxy of the day. In their models with rational expectations, not only was monetary policy unable to alter the long-term level of unemployment, it could not even contribute to stabilization around the natural rate.(2) The New Keynesian economics has shown that, even with rational expectations, small amounts of wage and price stickiness permit a stabilizing monetary policy.(3) But the idea of a natural unemployment rate that is invariant to inflation still characterizes macroeconomic modeling and informs policymaking. The familiar empirical counterpart to the theoretical natural rate is the nonaccelerating-inflation rate of unemployment, or NAIRU. Phillips curves embodying a NAIRU are estimated using lagged inflation as a proxy for inflationary expectations. NAIRU models appear in most textbooks, and estimates of the NAIRU--which is assumed to be relatively constant--are widely used by economic forecasters, policy analysts, and policymakers. However, the inadequacy of such models has been demonstrated forcefully in recent years, as low and stable rates of inflation have coexisted with a wide range of unemployment rates. If there were a single, relatively constant natural rate, we should have seen inflation slowing significantly when unemployment was above that rate, and rising when it was below. Instead, the inflation rate has remained fairly steady, with annual inflation as measured by the urban consumer price index (CPI-U) ranging from 1.6 to 3.0 percent since 1992, while the unemployment rate has ranged from 6.8 to 3.9 percent. In this paper we present a model that can accommodate relatively constant inflation over a wide range of unemployment rates. Another motivation is a recent finding by William Brainard and George Perry.(4) Estimating a Phillips curve in which all the parameters are allowed to vary over time, they find that the coefficient on the proxy for expected inflation in the Phillips curve has changed considerably, while other parameters of that model have been relatively constant. In particular, Brainard and Perry found that the coefficient on expected inflation was initially low in the 1950s and 1960s, grew in the 1970s, and has fallen since then. The model we present can explain both why the coefficient on expected inflation might be expected to change over time and, to some extent, the time pattern of changes observed by Brainard and Perry. Our paper also allows an interpretation of the findings of Robert King arm Mark Watson and of Ray Fair.(5) Both find a long-run trade-off between inflation and unemployment. In addition, King and Watson find that the amount of inflation that must be tolerated to obtain a given reduction of unemployment rose considerably after 1970. Our model allows a trade-off, but only at low rates of inflation such as those that prevailed in the 1950s, 1960s, and 1990s. At higher rates of inflation, the trade-off is reduced, and at high enough rates of inflation, it disappears. Much of the empirical controversy surrounding the relationship between inflation and unemployment has focused on how people form expectations. This may be neither the most important theoretical nor the most important empirical issue. Instead, this paper suggests that it is not how people form expectations but how they use them--and even whether they use them at all--that is the issue. Economists typically assume that economic agents make the best possible use of the information available to them. But psychologists who study how people make decisions have a different view. …

Alternative Measures of the NAIRU in the Euro Area: Estimates and Assessment

The paper focuses on the measurement of the NAIRU (Non-Accelerating-Inflation-Rate-of-Unemployment) for the euro area and assesses the usefulness of different methodologies developed in the literature to estimate this unobservable variable at the aggregate level. After reviewing the theoretical framework underlying the most common estimation approaches, it presents several estimates of the area-wide NAIRU based on a number of direct (or statistical) techniques. The latter range from simple univariate filtering approaches to more complex multivariate methods based on Phillips curve relationships. The different estimates of the aggregate NAIRU appear to be consistent and robust with respect to alternative specifications, methodologies and choice of the inflation indicator. They also show significant inflation forecasting ability and are able to produce sensible measures of the output gap, therefore providing some ground to argue that unemployment and the unemployment gap may be a useful variable to analyse short-term economic developments at the euro area level.

The Phillips curve in Australia

In this paper we discuss the development of Phillips curves in Australia over the forty years since Phillips first estimated one using Australian data. We examine the central issues faced by researchers estimating Australian Phillips curves. These include the distinction between the short- and long-run trade-offs between inflation and unemployment, and the changing level of the non-accelerating inflation rate of unemployment (NAIRU), particularly in the 1970s. We estimate Phillips curves for prices and unit labour costs in Australia over the past three decades. These Phillips curves allow the NAIRU to change through time, and include a role for import prices and `speed-limit’ effects. The paper concludes by discussing the changing role of the Phillips curve in the intellectual framework used to analyse inflation within the Reserve Bank of Australia over the past three decades.

Is NAIRU Worth a Can of Beans?

Is NAIRU Worth a Can of Beans?