How Precise are Estimates of the Natural Rate of Unemployment?

Douglas Staiger, James H. Stock and Mark W. Watson

No 5477, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper investigates the precision of conventional and unconventional estimates of the natural rate of unemployment (the 'NAIRU'). The main finding is that the NAIRU is imprecisely estimated: a typical 95% confidence interval for the NAIRU in 1990 is 5.1% to 7.7%. This imprecision obtains whether the natural rate is modeled as a constant, as a slowly changing function of time, as an unobserved random walk, or as a function of various labor market fundamentals; it obtains using other series for unemployment and inflation, including additional supply shift variables in the Phillips curve, using monthly or quarterly data, and using various measures for expected inflation. This imprecision suggests caution in using the NAIRU to guide monetary policy.

JEL-codes: E6 (search for similar items in EconPapers)
Date: 1996-03
Note: EFG ME
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Chapter: How Precise Are Estimates of the Natural Rate of Unemployment? (1997)
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