Apel, M., and P. Jansson, (1999a), “System Estimates of Potential Output and the NAIRU”, Empirical Economics, Vol. 24, pp. 373–88.
Apel, M., and P. Jansson, (1999b), “A Theory-Consistent System Approach for Estimating of Potential Output and the NAIRU”, Economic Letters, Vol. 64, pp. 271–75
Blanchard, O., and J. Wolfers, (1999): “The Role of Shocks and Institutions in the Rise of European Unemployment: the Aggregate Evidence”, (mimeo).
Fabiani, S., and R. Mestre, (2000), “Alternative Measures of the NAIRU in the Euro Area: Estimates and Assessment”, European Central Bank, Working Paper, No. 17.
Fagan, G., Henry, J., and R. Mestre, (2001), “An Area-Wide Model (AWM) for the Euro Area,” European Central Bank, Working Paper No. 42.
Laubach, T., (2001), “Measuring the NAIRU: Evidence from Seven Economies”, Review of Economics and Statistics, May, Vol. 83(2), pp. 218–231.
Lown, C. and R. Rich, (1997), “Is There an Inflation Puzzle?,” Federal Reserve Bank of New York Economic Policy Review, December, pp. 51–69.
Mendez, G., and G. Palenzuela, (2001), “Assessment of Criteria for Output Gap Estimates”, Working Paper No. 54. European Central Bank.
Orphanides, A., and S. Van Norden, (1999), “The Reliability of Output Gap Estimates in Real Time,” Board of Governors of the Federal Reserve System Working Paper, Washington.
Perron, P., (1997), “Further Evidence on Breaking Trend Functions in Macroeconomic Variables,” Journal of Econometrics, Vol. 80, pp. 355–385
However, this assumes 1(2) behavior, implying that the change in unemployment or output is unbounded. Furthermore, as Laubach (2001) has pointed out, while many country’s NAIRU can be modeled as an 1(2) series, the resultant output gaps may not, in many instances, be sufficiently related to the inflation rate to be considered true NAIRU estimates.
See M. Apel and P. Jansson, (1999a), “System Estimates of Potential Output and the NAIRU”, Empirical Economics, 24:373-88 for details.
Although the standard Philips curve is formulated in terms of the level of inflation, Apel and Jansson (1999a) demonstrate that in the presence of a unit root, the Phillips curve can be restated in terms of the change in inflation. Given that unit root tests on inflation were inconclusive, the model was estimated in both level and change terms. The results were not materially different between either specification.
A dummy variable is also included in 1998:4, representing the startup of Stage III of EMU.
This atheoretical framework recognizes that information regarding the true structural determinants of potential output and the NAIRU may be limited. However, the use of supply shocks to identify cyclical components—and therefore the long run components-explicitly links potential output and the NAIRU to supply-side factors.
We use an unemployment series that does not contain the recent corrections made by Eurostat. End-2000 unemployment was 8.8 percent under this series as compared to 8.3 percent in the Eurostat series.
See P. Perron (1997), “Further Evidence on Breaking Trend Functions in Macroeconomic Variables, “Journal of Econometrics, 80:355-385.
An examination of the estimated inflation series suggested a well fitted model. In addition, the variances of the shocks to cyclical unemployment and the NAIRU were about ½ and ¾ of the shock to the variance of inflation, indicating that unemployment gaps explained a large part of the variance in inflation.
Given the small number of post-EMU observations, the likelihood ratio statistic may not correctly identify the direction and magnitude of the true regime change. Thus, this coefficient may be just picking up the changed direction of inflation.
This is an important point. As discussed in Orphanides and Van Norden (1999), for a realtime output gap measures to be useful for monetary policy, they should not change much from their original estimate when additional information becomes available over time. Mendez and Palenzuela (2001) found that output gaps from an Apel-Jansson type models were consistent when applied to euro area data, i.e., real time and historical output gaps did not differ significantly.
The somewhat larger implied differences in unemployment gaps versus the output gaps suggests that implicit estimates of the Okun coefficient may vary substantially.
The production function estimates were calculated by following the methodology applied in the ECB’s area-wide model, (see Fagan, Henry, and Mestre, (2001)).
Blanchard and Wolfers, (2000), suggest that as the effects of negative shocks—e.g., rising real interest rates and declines in total factor productivity—fade and as European labor market institutions improve, employment growth should pick up.