The European Commission's new NAIRU: Does it deliver?

Sebastian Gechert, Katja Rietzler () and Silke Tober

Applied Economics Letters, 2016, vol. 23, issue 1, 6-10

Abstract: The non-accelerating inflation rate of unemployment (NAIRU) is a key component of potential output and as such critically affects output gap estimates. In May 2014, the European Commission changed its specification of the NAIRU for several countries and lowered its NAIRU estimates - in the case of Spain from 26.6% to 20.7% for 2015. To test the dependence of the new NAIRU on unemployment versus structural factors, we run counterfactual simulations applying 1SD shocks to actual unemployment and to the structural variable - real unit labour costs. We find that the NAIRU in its new specification is still largely determined by actual unemployment. This calls in question both the interpretation of potential output estimates as barriers to more vigorous inflation-stable economic activity and the accuracy of structural deficit figures.

Date: 2016
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Working Paper: The European Commission’s New NAIRU: Does it Deliver? (2014)
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DOI: 10.1080/13504851.2015.1044641

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