DOCSLIB.ORG

The Nairu Concept, Its Phillips Curve Origins and Its Evolution in Terms of the Economic Policy Debate

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
The Nairu Concept, Its Phillips Curve Origins and Its Evolution in Terms of the Economic Policy Debate 7+(1$,58&21&(37±0($685(0(17 81&(57$,17,(6+<67(5(6,6$1'(&2120,& 32/,&<52/( 30&$'$0$1'.0&02552: 7$%/(2)&217(176 ,QWURGXFWRU\5HPDUNV &KDSWHUUncertainties concerning model selection : A number of plausible modelling approaches exist for Measuring the NAIRU 1.1 Univariate Methods / Models 1.2 Variants of the Expectations Augmented Phillips Curve Approach &KDSWHUProduction of NAIRU estimates for the US, Japan and EU- 15 using a Conventional Bargaining model approach &KDSWHU Empirical Inadequacies : Uncertainties surrounding the NAIRU Point Estimates 3.1 Confidence Intervals 3.2 Results from US and Canadian NAIRU studies &KDSWHU Theoretical Weaknesses : The Notion of Hysteresis Complicates the Interpretation of Changes in the NAIRU &KDSWHU The Nairu Concept, its Phillips Curve Origins and its Evolution in terms of the Economic Policy Debate &RQFOXGLQJ5HPDUNV 2 7+(1$,58&21&(37±0($685(0(17 81&(57$,17,(6+<67(5(6,6$1' (&2120,&32/,&<52/( ,1752'8&725<5(0$5.6 In 1968 Friedman put forward the notion of a “natural” rate of unemployment to encapsulate the idea that a “normal” level of unemployment, roughly equivalent to the amount of frictional and structural unemployment, persists even when the labour market is in equilibrium. Since there are no direct measures of the natural rate, as it is essentially a theoretical construct, one must be satisfied with proxy estimates derived using various methods including that which draws on Tobin’s concept of the non- accelerating inflation rate of unemployment(i.e. the NAIRU). This latter concept has been used extensively since the 1970s to show that policy makers are not in a position to buy permanent reductions in unemployment by tolerating a higher rate of inflation. Once expectations have fully adapted to any new expansionary policy regime, unemployment will ultimately return to that level of unemployment required to hold inflation steady i.e. the NAIRU. Deviations from the NAIRU or natural rate could only be maintained at the cost of continuously accelerating or decelerating wage increases with the former leading to the well-known phenomenon of wage-price spirals. The concept of the NAIRU should therefore be seen in the context of the shift in the framework for analysis of the labour market over the last number of decades from one focussed on whether the labour market clears or not, to one which allows for imperfectly competitive goods markets and recognises that unions have a role to play in terms of wage determination. This shift to a bargaining framework of wage setting under imperfect competition is likely to lead to a NAIRU estimate which converges to an unemployment rate which is higher, because of the monopolistic element, compared with that under the classical competitive paradigm and its theoretically equivalent concept of the natural rate. The present paper looks at this notion of a NAIRU and asks whether it continues to stand up to rigorous analysis in terms of both its theoretical underpinnings or of its empirical applicability. The paper addresses the essential questions in relation to an examination of the NAIRU, namely • 1. Can it be reliably calculated ? and • 2. Does the concept continue to have any relevance in terms of the micro and macro policy debate ? In relation to the first question, it is stressed that precise measurements of the NAIRU are extremely difficult to produce because any measurement process is dogged by the existence of two fundamental sources of uncertainty. The first source of uncertainty 3 emanates from the fact that the NAIRU must be estimated since it is unobserved, with many different modelling approaches and empirical specifications from which to choose, all of which give plausible, although different, point measurements of the NAIRU. Amongst the competing approaches a preference is shown for the bargaining model method, with the latter being used to produce NAIRU estimates for the US, Japan and the EC15. The second source of uncertainty is the degree of doubt surrounding the NAIRU point estimates themselves, which are imprecisely calculated from a combination of stochastic variables and parameters, with the computing of confidence intervals for the latter highlighting the extent of the imprecision of the various methods used in the calculation. This latter issue of confidence interval estimation is discussed in detail, with the results of the various calculation methods being presented. As regards the second question, following a discussion on the history of the NAIRU, which stresses its Phillips Curve origins and its role in the policy debates over the last three decades, the paper goes on to discuss the issue of the continuing policy relevance of the concept. In this regard, the growing unease, openly articulated in the vast literature on this topic, concerning both the theoretical and empirical underpinnings of the NAIRU, suggests caution needs to be exercised in terms of any policy role being attributed to the concept. At a fundamental level the theoretical weaknesses, in particular hysteresis mechanisms, call into question the existence of a unique long run NAIRU, i.e. it may be indeterminate or stochastic by nature. At a more practical level, as mentioned above, the existence of a multitude of different point estimates due to model selection/specification differences allied to wide confidence intervals for all of the individual point estimates produced must instil a strong sense of dubiousness in the minds of policy makers. The paper tentatively concludes that while theoretically the NAIRU is still a useful concept its extensive empirical inadequacies render it less than useful in the macro policy context, although a case can still be made for sustaining its use as a structural indicator for cross country, labour flexibility, comparisons. 4 &+$37(5 81&(57$,17,(6 &21&(51,1* 02'(/ 6(/(&7,21 $ 180%(5 2) 3/$86,%/( 02'(//,1* $3352$&+(6 (;,67 )25 0($685,1*7+(1$,58 There are two broad modelling approaches normally adopted in defining the NAIRU, the expectations-augmented Phillips curve approach, which distinguishes a series of labour market variables as potential empirical determinants of the NAIRU, and the atheoretical univariate framework method in which the time series properties of the macroeconomic variable in question are used to identify the NAIRU. 81,9$5,$7( 0(7+2'6 02'(/6: Univariate methods are essentially statistical as opposed to economic models of the NAIRU, with the underlying assumption being that unemployment always reverts to its mean or natural rate over time. If the latter assumption is true then the NAIRU can be defined uniquely in terms of the behaviour of the unemployment series itself. Conceptually, in terms of the dynamics of unemployment, most time series methods for constructing NAIRU estimates break down the unemployment rate into a deterministic or trend component, which is understood to represent the NAIRU, and a stochastic or cyclical element. Changes in the deterministic component of unemployment could be interpreted as occurring as a result of structural breaks or regime changes which have the effect of shifting the equilibrium rate of unemployment from time to time; for example the widespread adoption of non-accommodating policies in the early 1980s is often represented as a policy regime change which could have fundamentally modified wage determination relationships and consequently the NAIRU. A radically different interpretation is also possible, based on the notion of hysteresis mechanisms operating in the labour market, which suggests that there is no equilibrium level to which unemployment reverts to in the long run i.e. equilibrium unemployment rates may be non-stationary in that they follow a stochastic or indeterminate trend. Adopting this latter interpretation would suggest that the NAIRU is history dependent in that it is heavily influenced by the historical evolution of actual unemployment. ,681(03/2<0(17$67$7,21$5<2512167$7,21$5<352&(66" : Since inflation has been stable in Europe for some years now one could, in theory, make a case for suggesting that the prevailing rate of unemployment in Europe is close to, or equal to, its natural rate. However, this is only true if the unemployment series itself is a stationary one. Since the unemployment series in Europe may be non-stationary (i.e. it may not be mean reverting or it may be very slowly mean reverting due to the influence of slow adjustment mechanisms in the labour market) then it may be difficult to estimate a long-run NAIRU since although the present rate of inflation may be stable, the unemployment rate may or may not be. Consequently, this distinction between stationary and non-stationary series is an important one and depends on whether or not the variable contains a unit root. Testing the US and EC15 unemployment series for the presence of a unit root can be carried out in several ways with the augmented Dickey- Fuller (ADF) and Phillips- Perron (PP) tests being adopted for the present exercise. In testing for the presence of a unit root, it is necessary to allow both an intercept and a time trend to enter the 5 regression model. The null hypothesis to be tested is that the unemployment time series is non-stationary (i.e. it contains a unit root) against the alternative hypothesis of stationarity. ADF and PP statistics for the US and EC15 unemployment rates are shown in Table 1 and when compared with the MacKinnon critical values clearly suggest that for both areas, the unemployment series are non-stationary, although the US comes much closer than the EU to rejecting the null hypothesis. This latter distinction between the two areas is corroborated in Graph 1 which shows trend unemployment1 for both geographical zones, with the EU15 trend appearing to drift upwards from cycle to cycle whereas the US appears to be moving back to its mean 1970’s value in the present decade.
Load more

Recommended publications
  • Total and Short-Term Unemployment and the Recent Behavior of Prices and Wages
    Total and Short-term Unemployment and the Recent Behavior of Prices and Wages Background Background (cont.) • FRBNY staff analysis: considerable slack remains • Motivation to explore these issues: “missing in the economy deflation puzzle” • Labor market flows • “Standard” Phillips Curve models → very low inflation or deflation in the aftermath of the Great Recession • This assessment is an important factor in FRBNY • Compensation growth also should have been lower staff outlook • A restraining factor for price- and wage-inflation • One proposed explanation: Short-term/long-term unemployment distinction • However, recent research has focused on two • Long-term unemployed (unemployment duration > 27 issues: weeks): limited impact on price/wage inflation • Extent of slack in labor market • Short-term unemployment near historical average: less • Magnitude of restraining effect on inflation from slack than implied by conventional measures conventional measure(s) of labor market slack Unemployment Rates by Duration Illustration of “Standard” Approach: Gordon (2013) Percent Percent 12 12 • Price-inflation (PCE deflator) Phillips curve model: Correlation Between Short- • Lagged inflation terms term and Long-term 10 Unemployment 10 • Unemployment gap based on: 1976—2007 0.63 • Total unemployment rate 1976—2013 0.28 8 8 • Short-term unemployment rate Total Unemployment • Supply shocks: 6 6 • Food and energy inflation • Relative import price inflation 4 Short-term 4 • Trend productivity acceleration/deceleration variable Unemployment Long-term • Other features: 2 Unemployment 2 • 1960:Q1-2013:Q1 sample period 0 0 • Joint estimation of time-varying NAIRU 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 4 Source: Bureau of Labor Statistics Total and Short-term Unemployment and the Recent Behavior of Prices and Wages Evaluation of Short-term vs.
    [Show full text]
  • New Keynesian Macroeconomics: Empirically Tested in the Case of Republic of Macedonia
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Josheski, Dushko; Lazarov, Darko Preprint New Keynesian Macroeconomics: Empirically tested in the case of Republic of Macedonia Suggested Citation: Josheski, Dushko; Lazarov, Darko (2012) : New Keynesian Macroeconomics: Empirically tested in the case of Republic of Macedonia, ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften, Leibniz-Informationszentrum Wirtschaft, Kiel und Hamburg This Version is available at: http://hdl.handle.net/10419/64403 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu NEW KEYNESIAN MACROECONOMICS: EMPIRICALLY TESTED IN THE CASE OF REPUBLIC OF MACEDONIA Dushko Josheski 1 Darko Lazarov2 Abstract In this paper we test New Keynesian propositions about inflation and unemployment trade off with the New Keynesian Phillips curve and the proposition of non-neutrality of money.
    [Show full text]
  • HYSTERESIS and the NAIRU: DOI: 10.18267/J.Pep.526 the CASE of COUNTRIES Accepted: 25
    Prague Economic Papers HYSTERESIS AND THE NAIRU: DOI: 10.18267/j.pep.526 THE CASE OF COUNTRIES Accepted: 25. 6. 2014 IN TRANSITION Published: 20. 7. 2015 Gordana Marjanovic, Ljiljana Maksimovic,1Nenad Stanisic* Abstract: The paper examines the hysteresis hypothesis in unemployment in the case of eight selected countries in transition, using the Kalman fi lter and testing whether the NAIRU time series are ONLINE FIRST ONLINE stationary. The empirical results show that the hysteresis eff ect is confi rmed for the majority of the countries. Testing the infl uence of the infl ation growth rate on the decline in the NAIRU and / vice versa, performed using the panel regression with fi xed eff ect, confi rmed that the increase in infl ation leads to decline in the NAIRU. The conclusion also suggests the existence of the impact of actual unemployment rate on the NAIRU, which may be aff ected by the change in aggregate demand. Keywords: hysteresis, NAIRU, Kalman fi lter, infl ation, unemployment. JEL Classifi cation: E24, E30, E50, C13 1. Introduction Unemployment is a major problem, both in developed market economies, and countries that have gone through the transitional changes. Therefore, the goal of economic policy in modern economies is to reduce unemployment and thereby to avoid the rising infl a- tionary pressures. In achieving this goal, the concept of Non - Accelerating Infl ation Rate of Unemployment (NAIRU) and policy recommendations arising from this concept are of great importance. NAIRU concept was fi rst introduced by Modigliani and Papademos in 1975 (Snowdon, Vane, 2005, p. 402). Among economists, there are signifi cant discrepancies in the defi nitions of the concepts of natural rate of unemployment (NRU), which was founded by Nobel Laureate M.
    [Show full text]
  • Hysteresis in Unemployment: Old and New Evidence
    NBER WORKING PAPER SERIES HYSTERESIS IN UNEMPLOYMENT: OLD AND NEW EVIDENCE Laurence M. Ball Working Paper 14818 http://www.nber.org/papers/w14818 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 2009 This paper was prepared for "A Phillips Curve Retrospective" sponsored by the Federal Reserve Bank of Boston in June 2008. I am grateful for research assistance from Sandeep Mazumder and for comments from V.V. Chari, Jordi Gali, Engelbert Stockhammer, two anonymous referees, and conference participants. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2009 by Laurence M. Ball. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Hysteresis in Unemployment: Old and New Evidence Laurence M. Ball NBER Working Paper No. 14818 March 2009 JEL No. E24 ABSTRACT This paper argues that hysteresis helps explain the long-run behavior of unemployment. The natural rate of unemployment is influenced by the path of actual unemployment, and hence by shifts in aggregate demand. I review past evidence for hysteresis effects and present new evidence for 20 developed countries. A central finding is that large increases in the natural rate are associated with disinflations, and large decreases with run-ups in inflation.
    [Show full text]
  • Hysteresis in Economic Relationships: an Overview
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Franz, Wolfgang Working Paper Hysteresis in economic relationships: An overview Diskussionsbeiträge - Serie II, No. 104 Provided in Cooperation with: Department of Economics, University of Konstanz Suggested Citation: Franz, Wolfgang (1990) : Hysteresis in economic relationships: An overview, Diskussionsbeiträge - Serie II, No. 104, Universität Konstanz, Sonderforschungsbereich 178 - Internationalisierung der Wirtschaft, Konstanz This Version is available at: http://hdl.handle.net/10419/101650 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Universitat [\> Kor stanz ^=^ ¥^~ Sonderforschungsbereich 178 IV — Jnternationalisierung der Wirtschaft" 7Y AA Diskussionsbeitrage Juristische Fakultat fur Wirtschafts- Fakultat wissenschaften und Statistik Wolfgang Franz Hysteresis in Economic Relationships: An Overview 21 MAI 1990 Kial kJ Postfach 5560 Serie II — Nr.
    [Show full text]
  • Recovering Keynesian Phillips Curve Theory: Hysteresis of Ideas and the Natural Rate of Unemployment
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Palley, Thomas Working Paper Recovering Keynesian Phillips Curve Theory: Hysteresis of Ideas and the Natural Rate of Unemployment FMM Working Paper, No. 26 Provided in Cooperation with: Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation Suggested Citation: Palley, Thomas (2018) : Recovering Keynesian Phillips Curve Theory: Hysteresis of Ideas and the Natural Rate of Unemployment, FMM Working Paper, No. 26, Hans-Böckler-Stiftung, Macroeconomic Policy Institute (IMK), Forum for Macroeconomics and Macroeconomic Policies (FFM), Düsseldorf This Version is available at: http://hdl.handle.net/10419/181484 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu FMM WORKING PAPER No. 26 · June, 2018 · Hans-Böckler-Stiftung RECOVERING KEYNESIAN PHILLIPS CURVE THEORY: HYSTERESIS OF IDEAS AND THE NATURAL RATE OF UNEMPLOYMENT Thomas Palley* ABSTRACT Economic theory is prone to hysteresis.
    [Show full text]
  • Hysteresis in Employment Among Disadvantaged Workers
    Hysteresis in Employment among Disadvantaged Workers Bruce Fallick Federal Reserve Bank of Cleveland Pawel Krolikowski Federal Reserve Bank of Cleveland System Working Paper 18-08 March 2018 The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. This paper was originally published as Working Paper no. 18-01 by the Federal Reserve Bank of Cleveland. This paper may be revised. The most current version is available at https://doi.org/10.26509/frbc-wp-201801. __________________________________________________________________________________________ Opportunity and Inclusive Growth Institute Federal Reserve Bank of Minneapolis • 90 Hennepin Avenue • Minneapolis, MN 55480-0291 https://www.minneapolisfed.org/institute working paper 18 01 Hysteresis in Employment among Disadvantaged Workers Bruce Fallick and Pawel Krolikowski FEDERAL RESERVE BANK OF CLEVELAND ISSN: 2573-7953 Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded offi cial Federal Reserve Bank of Cleveland publications. The views stated herein are those of the authors and are not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System. Working papers are available on the Cleveland Fed’s website: https://clevelandfed.org/wp Working Paper 18-01 February 2018 Hysteresis in Employment among Disadvantaged Workers Bruce Fallick and Pawel Krolikowski We examine hysteresis in employment-to-population ratios among less- educated men using state-level data. Results from dynamic panel regressions indicate a moderate degree of hysteresis: The effects of past employment rates on subsequent employment rates can be substantial but essentially dissipate within three years.
    [Show full text]
  • The Labor Market and the Phillips Curve
    4 The Labor Market and the Phillips Curve A New Method for Estimating Time Variation in the NAIRU William T. Dickens The non-accelerating inflation rate of unemployment (NAIRU) is fre- quently employed in fiscal and monetary policy deliberations. The U.S. Congressional Budget Office uses estimates of the NAIRU to compute potential GDP, that in turn is used to make budget projections that affect decisions about federal spending and taxation. Central banks consider estimates of the NAIRU to determine the likely course of inflation and what actions they should take to preserve price stability. A problem with the use of the NAIRU in policy formation is that it is thought to change over time (Ball and Mankiw 2002; Cohen, Dickens, and Posen 2001; Stock 2001; Gordon 1997, 1998). But estimates of the NAIRU and its time variation are remarkably imprecise and are far from robust (Staiger, Stock, and Watson 1997, 2001; Stock 2001). NAIRU estimates are obtained from estimates of the Phillips curve— the relationship between the inflation rate, on the one hand, and the unemployment rate, measures of inflationary expectations, and variables representing supply shocks on the other. Typically, inflationary expecta- tions are proxied with several lags of inflation and the unemployment rate is entered with lags as well. The NAIRU is recovered as the constant in the regression divided by the coefficient on unemployment (or the sum of the coefficient on unemployment and its lags). The notion that the NAIRU might vary over time goes back at least to Perry (1970), who suggested that changes in the demographic com- position of the labor force would change the NAIRU.
    [Show full text]
  • Two Approaches for Measuring the NAIRU Considered
    TI 2007-017/1 Tinbergen Institute Discussion Paper Derived Measurement in Macroeconomics: Two Approaches for Measuring the NAIRU Considered Peter Rodenburg University of Amsterdam. Tinbergen Institute The Tinbergen Institute is the institute for economic research of the Erasmus Universiteit Rotterdam, Universiteit van Amsterdam, and Vrije Universiteit Amsterdam. Tinbergen Institute Amsterdam Roetersstraat 31 1018 WB Amsterdam The Netherlands Tel.: +31(0)20 551 3500 Fax: +31(0)20 551 3555 Tinbergen Institute Rotterdam Burg. Oudlaan 50 3062 PA Rotterdam The Netherlands Tel.: +31(0)10 408 8900 Fax: +31(0)10 408 9031 Most TI discussion papers can be downloaded at http://www.tinbergen.nl. Derived Measurement in Macroeconomics: Two Approaches for Measuring the NAIRU considered ∗ Peter Rodenburg Faculty of Economics and Econometrics and Faculty of European Studies University of Amsterdam Spuistraat 134 1012 VB Amsterdam The Netherlands Tel: 0031 20-525 4660 E-mail: [email protected] http://home.medewerker.uva.nl/p.rodenburg/ Abstract: This paper investigates two different procedures for the measurement of the NAIRU; one based on structural modeling while the other is a statistical approach using Vector Auto Regression (VAR)-models. Both measurement procedures are assessed by confronting them with the dominant theory of measurement, the Representation Theory of Measurement, which states that for sound measurement a strict isomorphism (strict one-to- one mapping) is needed between variations in the phenomenon (the NAIRU) and numbers. The paper argues that shifts of the Phillips-curve are not a problem for the structural approach to measurement of the NAIRU, as the NAIRU itself is a time-varying concept.
    [Show full text]
  • The NAIRU, Unemployment and Monetary Policy
    Journal of EconomicPerspectives-Volume 11, Number1-Winter 1997-Pages 33-49 The NAIRU, Unemployment and Monetary Policy Douglas Staiger, James H. Stock, and Mark W. Watson S ince Milton Friedman's(1968) presidentialaddress to the AmericanEco- nomic Association, one of the most enduring ideas in macroeconomics has LJ been that inflation will increase when unemployment persists below its nat- ural rate, the so-called NAIRU, or nonaccelerating inflation rate of unemployment. But what is the NAIRU? Is it 5.8 percent as estimated by the CBO (1996)? Is it 5.7 percent as used by the Council of Economic Advisors (1996) or 5.6 percent as estimated by Gordon (this issue)? Or can unemployment safely go much lower, as recently argued by Eisner (1995a,b)? For all of 1995 and the first two quarters of 1996, unemployment hovered around 5.6 percent, while inflation remained in check. This has led to a debate among academics and policymakers over whether there has been a decline in the NAIRU and, more generally, whether economists should continue to rely on unemployment and the NAIRU as indicators of an over- heated economy (Weiner, 1993, 1994; Tootell, 1994; Fuhrer, 1995; Council of Eco- nomic Advisors, 1996, pp. 51-57; Congressional Budget Office, 1996, pp. 5, 27). At the heart of this debate lie several empirical questions. Has the NAIRU declined in recent years? What is the current value of the NAIRU? How confident should economists be in these estimates? How useful is knowledge of NAIRU in *Douglas Staigeris AssistantProfessor of PoliticalEconomy, Kennedy School of Government, Harvard University,Cambridge, Massachusetts.
    [Show full text]
  • Job Guarantee: Marxist Or Keynesian?
    Job Guarantee: Marxist or Keynesian? stumblingandmumbling.typepad.com/stumbling_and_mumbling/2018/05/job-guarantee-marxist-or-keynesian.html Chris Dillow, Stumbling and Mumbling, May 11, 2018 For decades there has been a debate about the differences and similarities between Marx and Keynes. The question of whether we should introduce a job guarantee highlights this debate: is it a means of supporting capitalism, or a challenge to it? A job guarantee is the offer by the government of a job at a living wage to anybody that wants one. This would, in effect, eliminate involuntary unemployment. Pavlina Tcherneva has a nice paper (pdf) describing the details. Other advocates of it are Randy Wray (pdf) and colleagues, FitzRoy and Jin (pdf), Paul, Darity and Hamilton and Wisman and Pacitti. The case for such a policy seems obvious. Although official unemployment seems low, there are a further 2.1 million people out of the labour force who want to work. This means there are almost 3.5 million unemployed – 8.5% of the working age population. And for some groups – the young, unskilled, some ethnic minorities, the disabled or unwell – the jobless rate is far higher. This matters because unemployment is a massive cause of misery. It is associated with (pdf) unhappiness, suicide, and lower wages (pdf) and worse job prospects even for those who return to work: Danny Blanchflower and David Bell summarize (pdf) its many ill-effects. As Jeff Spross says: A job is not merely a delivery mechanism for income that can be replaced by an alternative source. It’s a fundamental way that people assert their dignity, stake their claim in society, and understand their mutual obligations to one another.
    [Show full text]
  • Keynes After Sraffa and Kaldor: Effective Demand, Accumulation and Productivity Growth Alcino F. Camara-Neto and Matías Verne
    DEPARTMENT OF ECONOMICS WORKING PAPER SERIES Keynes after Sraffa and Kaldor: Effective demand, accumulation and productivity growth Alcino F. Camara-Neto and Matías Vernengo Working Paper No: 2010-07 University of Utah Department of Economics 260 S. Central Campus Dr., Rm. 343 Tel: (801) 581-7481 Fax: (801) 585-5649 http://www.econ.utah.edu 1 Keynes after Sraffa and Kaldor: Effective demand, accumulation and productivity growth Alcino F. Camara-Neto Dean, Law and Economic Sciences Center, Federal University of Rio de Janeiro Matías Vernengo University of Utah Federal University of Rio de Janeiro Abstract This paper analyzes to what extent John Maynard Keynes was successful in showing that the economic system tends to fluctuate around a position of equilibrium below full employment in the long run. It is argued that a successful extension of Keynes’s principle of effective demand to the long run requires the understanding of the contributions by Piero Sraffa and Nicholas Kaldor. Sraffa provides the basis for the proper dismissal of the natural rate of interest, while the incorporation by Kaldor of the supermultiplier and Verdoorn’s Law allows for a theory of the rate of change of the capacity limit of the economy. Keywords: History of Macroeconomic Thought, Macroeconomic Models JEL Classification: B24, E10 Acknowledgements: The authors thank Thomas Cate for his careful reading and comments to a preliminary version of the paper. 2 Introduction One of the most controversial propositions in macroeconomics is that the economy is driven by demand. In The General Theory , Keynes clearly argued that the system would fluctuate in the long run around a position considerably below full employment.
    [Show full text]