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The European Commission’s New NAIRU: Does it Deliver?

Sebastian Gechert (), Katja Rietzler () and Silke Tober

No 142-2014, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute

Abstract: The 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 one-standard deviation shocks to actual unemployment and to the structural variable – real unit labor 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.

Keywords: NAIRU; Kalman filter; output gap; euro area; structural deficit (search for similar items in EconPapers)
JEL-codes: E23 E24 E31 (search for similar items in EconPapers)
Pages: 8 pages
Date: 2014
New Economics Papers: this item is included in nep-eec, nep-lab and nep-mac
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Journal Article: The European Commission's new NAIRU: Does it deliver? (2016) Downloads
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