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Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty

Arturo Estrella and Frederic Mishkin ()

No 6518, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E5 (search for similar items in EconPapers)
Date: 2000-09
Note: ME
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Published as Monetary Policy Rules, edited by John B. Taylor, pp. 405-430, 1999. The University of Chicago Press.
Published as Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty , Arturo Estrella, Frederic S. Mishkin. in Monetary Policy Rules , Taylor. 1999

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Chapter: Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty (1999) Downloads
Working Paper: Rethinking the role of NAIRU in monetary policy: implications of model formulation and uncertainty (1998) Downloads
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