The Unnatural Rate of Unemployment: Reflections on the Barro-Gordon and Natural Rate Paradigms

Abhiruchi Rathi and Naveen Srinivasan
Additional contact information
Abhiruchi Rathi: Madras School of Economics, Chennai, India

Working Papers from Madras School of Economics,Chennai,India

Abstract: Unemployment and inflation exhibit a positive correlation during the 1970s in the United States. Ireland (1999) uses the time-inconsistency framework to study long and short run dynamics between the two rates. However, for the long-run, we find that the conditions for cointegration are not met whereas the short-run restrictions grounded in economic theory are strongly rejected. We look at the moving natural rate theory for an alternative explanation of the abnormal behavior of inflation and unemployment. We employ a structural vector autoregression (SVAR) model to study the impact of shocks to natural rate on the two series. We use the Beveridge-Nelson decomposition to extract short-run natural rate estimates from the unemployment series. Further, we identify factors affecting the short-run natural rate using regressions. We conclude that changes in labor-market institutions like unemployment benefits, labor productivity and real wages, as well as changes in labor force growth and real interest rates explain significant variation in the estimated natural rate of unemployment

Keywords: Phillips curve; Time-inconsistency; Natural rate; SVAR; Beveridge-Nelson decomposition; Labor-market institutions; IV estimation (search for similar items in EconPapers)
JEL-codes: C22 C3 E24 E31 E52 E61 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2020-06
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mse.ac.in/wp-content/uploads/2021/05/Working-Paper-191.pdf (application/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:mad:wpaper:2020-191

Access Statistics for this paper

More papers in Working Papers from Madras School of Economics,Chennai,India Contact information at EDIRC.
Bibliographic data for series maintained by Geetha G ().