How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland

Bjarni Einarsson and Jósef Sigurdsson

Economics from Department of Economics, Central bank of Iceland

Abstract: This paper estimates the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) for Iceland based on the Phillips curve using an iterative regression process and the Kalman filter. According to our results, the NAIRU rose sharply in the wake of the financial crisis, peaking at 5½% or 7% depending on estimation methodology. We evaluate what factors influence changes in the NAIRU. In particular, we assess whether changes in the NAIRU have been influenced by structural changes or changes in actual unemployment and therefore aggregate demand; i.e., whether there is evidence of hysteresis in unemployment. We find that time variation in the NAIRU is to a large extent due to hysteresis effects but to a lesser extent due to structural factors. This implies that monetary policy can have long-run effects on unemployment and its conduct is thus more complicated. Prudence in the government’s conduct of fiscal policy and labor unions’ and their counterparties’ wage bargaining becomes more important in the presence of hysteresis in unemployment, as inflationary pressures must be countered with a rise in interest rates, which can cause an increase in the NAIRU. Keeping inflation low becomes more important for the real economy in the presence of hysteresis in unemployment.

Date: 2013-07
New Economics Papers: this item is included in nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.cb.is/library/Skr%C3%A1arsafn---EN/Rese ... 0Paper%20No%2064.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 File not found (http://www.cb.is/library/Skr%C3%A1arsafn---EN/Research/Working%20Paper%20No%2064.pdf [301 Moved Permanently]--> https://www.cb.is/library/Skr%C3%A1arsafn---EN/Research/Working%20Paper%20No%2064.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ice:wpaper:wp64

Access Statistics for this paper

More papers in Economics from Department of Economics, Central bank of Iceland Contact information at EDIRC.
Bibliographic data for series maintained by Central Bank of Iceland ( this e-mail address is bad, please contact ).