The Time-varying NAIRU and its Implications for Economic Policy

This paper estimates the NAIRU (standing for the Non-Accelerating Inflation Rate of Unemployment) as a parameter that varies over time. The NAIRU is the unemployment rate that is consistent with a constant rate of inflation. Its value is determined in an econometric model in which the inflation rate depends on its own past values (‘inertia’), demand shocks proxied by the difference between the actual unemployment rate and the estimated NAIRU, and a set of supply shock variables. The estimation in this paper applies to the US economy over the period 1955–96. The estimated NAIRU differs somewhat for alternative measures of the inflation rate. The NAIRU estimated for the GDP deflator varies over the past 40 years within the narrow range of 5.7–6.4%; its estimated value for the most recent quarter (1996:Q1) is 5.7%. In that quarter a lower NAIRU of 5.3% is obtained for the chain-weighted personal consumption expenditure (PCE) deflator. Recent research claiming that there is a three-percentage-point range of uncertainty about the NAIRU is rejected as inconsistent with the behaviour of the US economy in the late 1980s and early 1990s.