COPING WITH UNCERTAINTY: HISTORICAL AND REAL-TIME ESTIMATES OF THE NATURAL UNEMPLOYMENT RATE AND THE UK MONETARY POLICY

George Chouliarakis

Manchester School, 2009, vol. 77, issue 4, pages 479-511

Abstract: The paper derives and compares historical and real-time estimates of the UK natural unemployment rate and shows that real-time estimates are fraught with noise and should be treated with scepticism. A counterfactual exercise shows that, for most of the 1990s, the Bank of England tracked changes in the natural rate relatively successfully, albeit with some recognition lag which, at times, might have led to excessively cautious policy. A careful scrutiny of the minutes of the monetary policy committee meetings reveals that such 'cautiousness' should be taken as evidence of awareness of the real-time informational limitations that monetary policy is facing. Copyright © 2009 The Author. Journal compilation © 2009 Blackwell Publishing Ltd and The University of Manchester.

Date: 2009

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