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What goes down must come up: understanding time-variation in the NAIRU

Evan Koenig

No 101, Working Papers from Federal Reserve Bank of Dallas

Abstract: The behavior of inflation during the 1990s is consistent with the predictions of a model that assumes a constant long-run NAIRU and a constant long-run markup of output prices over unit labor costs. Within this framework, inflation fell during the late 1990s - despite low unemployment - chiefly because an unusually high markup allowed firms to increase wages without raising prices. As the markup returns to normal, the recent unusually favorable unemployment -inflation trade-off can be expected to deteriorate. More generally, movements in the markup induce persistent but ultimately temporary variation in the NAIRU.

Keywords: Inflation (Finance); Unemployment (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2001
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