Semi-structural estimates of time-varying NAIRU
Based on the the New Keynesian Phillips Curve: Evidence from Eastern European economies.
A further possibility exists, namely that there has been a structural shift in the UK economy such that the natural rate of unemployment, or the NAIRU
, has shifted downwards.
, the full employment level of unemployment (or the level at which inflation is assumed to be stable) has varied considerably over time as well (Fig.
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.
That is the reason the equilibrium is often referred to as the NAIRU
. Shocks to the economy knock the labor market out of equilibrium.
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.
This trade-off between unemployment and inflation"described by the Phillips curve (named after the late New Zealand economist William Phillips)" is only temporary though; once prices adjust to a new equilibrium that clears the goods and services market firms go back to producing at full capacity and unemployment once again falls" to the NAIRU
The Fed currently estimates the Nairu
at between 5.2 percent and 5.5 percent, and the latest report puts the actual unemployment rate at 5.5 percent.
In later theory, this [un.sup.*.sub.t] concept was termed the NAIRU
(nonaccelerating inflation rate of unemployment).
They then related first-differences in inflation to the difference in the unemployment rate and a benchmark value they termed the NIRU for "noninflationary rate of unemployment." The NIRU (later called NAIRU
for nonaccelerating inflation rate of unemployment) is the value of the unemployment rate for which inflation remains at its past value.
Nevertheless, wages growth in the private sector continued to slow (8.2% yoy in December vs 10.1% in November), supporting our view that NAIRU
has likely slid along with the actual UR, i.e.