List of References
Gordon, Robert, 1997, “The Time-Varying NAIRU and its Implication for Economic Policy,” Journal of Economic Perspectives, Vol. 11, No. 1, pp. 11–32.
Staiger, Douglas, James Stock, and Mark Watson, 1997, “The NAIRU, Unemployment and Monetary Policy,” Journal of Economic Perspectives, Vol. 11, No. 1, pp. 33–49.
Prepared by Vincent Hogan.
The inflation variable is the annualized percentage change in the CPI for urban consumers excluding food and energy costs (often referred to as “core” inflation). The NAIRU is assumed constant over the period at 6 percent.
A formal Chow test rejects the hypothesis that the average forecast error is different from zero. However, if the observed forecast errors are truly random draws from a symmetric distribution, the probability that 10 of them are positive is less than 1 out of 1,000.
The model is semi-structural because observed unemployment is regressed on variables that are expected to affect it, but without attempting to identify the underlying behavioral relationships (i.e., it is a reduced-form equation).
The dependency ratio is calculated as ratio of the dependent population (all those aged 15 and under plus all those aged 65 and over) to the labor force.
Of the structural variables, only the index of unionization was statistically significant.
The Holdrick-Prescott filter is equivalent to regressing actual unemployment on a series of time trends and then taking the fitted values. The idea is that short-run changes are “filtered” out, and what is left is the long-run trend rate of unemployment. This can be thought of as an alternative measure of the NAIRU.
The Philips curve equation would also systematically overpredict inflation if the Holdrick-Prescott measure of the NAIRU were used instead.
The changes in the price of imports variable picks up the effect of a change in the value of the U.S. dollar, as well as changes in the foreign currency prices of U.S. imports. The real unit labor cost variable includes changes in wages, benefits, and productivity. These results are similar to those reported by Gordon (1997). He found that import prices had a significant effect on core inflation, but that the deviation of productivity from its trend (which is reflected here in the real unit labor cost variable) did not.