Non-Accelerating Inflation Rate of Unemployment

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Non-Accelerating Inflation Rate of Unemployment

Also called NAIRU. The unemployment rate in an economy below which inflation will begin to rise. The idea behind NAIRU states that a certain unemployment rate is built in to an economy. If unemployment falls too far, the economy will begin to overheat and inflation will rise. This analysis is highly controversial; some economists hold full employment is possible without these negative side effects. Milton Friedman was a major proponent of the NAIRU idea. See also: Phillips curve.
References in periodicals archive ?
In their view, real wages would adjust to make the quantity supplied of labor equal to the quantity demanded, and the unemployment rate would then stand at a level uniquely associated with that real wage--the "natural rate" of unemployment, often also called the "non-accelerating inflation rate of unemployment" or NAIRU.
The NAIRU is estimated to have declined further in the 2000s but the current crisis has probably raised it somewhat again, at least temporarily.
Such a poor fit of accelerationist Phillips curves, even allowing for a time-varying NAIRU, strengthens the case for forecasts of inflation that are independent of natural rate theory and policy strategies that explicitly recognize the uncertainty attached to these forecasts.
Today, not even advocates of the NAIRU can favor raising interest rates to fight inflation, for no plausible estimate of the NAIRU could come close to today's 5.
In the past, Meyer has identified two potential causes for a lower NAIRU in his periodic speeches on the economy.
We enter the variable in its level form and thereby abstract from any explicit discussion of the NAIRU, except to note that the specification can be viewed as implicitly assuming a constant value for the NAIRU over the sample period.
WHAT DO I THINK OF THE NAIRU CONCEPT AND ITS USEFULNESS TODAY?
These can be decomposed into the components attributable to the decline in labour force participation, the rise in the NAIRU, the rise in risk premia and the rise in the oil price.
Ball's (1997) attribution of cross-national variation in changes in the NAIRU in the 1980s and 1990s to inadequate stabilization policy in some countries that allowed cyclical unemployment to turn structural has striking implications.
A failure to have good and reliable measures of the output gap or NAIRU can result in destabilizing policy errors.
As Solow (1990) for instance claimed, calculating the NAIRU as a simple average of the actual rates of unemployment over the previous five years does a better job than calculating a NAIRU based on the traditionally hypothesised supply-side factors.