Rethinking the role of NAIRU in monetary policy: implications of model formulation and uncertainty

Arturo Estrella and Frederic Mishkin

No 9806, Research Paper from Federal Reserve Bank of New York

Abstract: In this paper we rethink the NAIRU concept and examine whether it might have a useful role in monetary policy. We argue that it can, but success depends critically on defining NAIRU as a short-run concept and distinguishing it from a long-run concept like the natural rate of unemployment. We examine what effect uncertainty has on the use of NAIRU in policy. Uncertainty about the level of NAIRU does not imply that monetary policy should react less to the NAIRU gap. However, uncertainty about the effect of the NAIRU gap on inflation does require adjustments to the policy reaction function. Also, as in Brainard (1967), uncertainty about the effect of the monetary policy instrument on the NAIRU gap reduces the magnitude of the policy response. We estimate a simple NAIRU gap model for the United States to obtain quantitative measures of uncertainty and to assess how these measures affect our view of the policy reaction function.

Keywords: Unemployment; Monetary policy (search for similar items in EconPapers)
Date: 1998
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Citations: View citations in EconPapers (59)

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Related works:
Working Paper: Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty (2000)
Chapter: Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty (1999)
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