In the mid-1990s, when Blinder was at the Fed, he and Janet Yellen, then a Fed governor, tried to persuade the chairman Alan Greenspan that interest rate increases were needed because the unemployment rate was quickly falling below estimates of NAIRU
in the 6 per cent and higher range.
is not a constant for all periods and locations.
However, according to Turner et al (2001) the derived measure of equilibrium unemployment corresponds more closely to a measure of the long-run equilibrium rate of unemployment rather than the NAIRU
which commonly appears in reduced-form Phillips curve specifications.
While the prevailing methodologies to estimate NAIRU
and potential output are imperfect, they are still useful.
In the early-to-mid 1990s, the Fed generally estimated the Nairu
as being between 5.
they have emphasized the correlation between the difference in the unemployment rate and a reference value often termed the NAIRU
(non-accelerating inflation rate of unemployment) and the change in the rate of inflation.
In addition to time variation arising from an evolving NAIRU
, the persistence of U.
In this specification, trend inflation is assumed to be equal to inflation in the previous period and the NAIRU
is assumed constant at 6 percent.
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 effect on the NAIRU
and any changes in the participation rate are expected to be only temporary and not affect medium-term trends, given that labour markets are quite flexible in Canada.
The first assumes the status quo, where the labour force participation rate and NAIRU
remain at the current level and labour productivity grows at its average rate calculated over the past decade.
In other words, if there is such a thing as a NAIRU
, or non-accelerating inflation rate of unemployment, it is path-determined and is smaller the greater amount of government expenditure on physical and human capital.