Seen and Unseen: NAIRU, informal labor market and talking points for monetary policy

César Carrera and Marko Razzo
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César Carrera: Banco Central de Reserva del Perú
Marko Razzo: Banco Central de Reserva del Perú

No 2026-001, Working Papers from Banco Central de Reserva del Perú

Abstract: This paper examines how labor-market informality alters the estimation and policy interpretation of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) in an emerging-market context. Using quarterly Peruvian data from 2007 to 2024, we estimate a time-varying parameter unobserved-components model with stochastic volatility following Chan, Koop, and Potter (2016). Bayesian MCMC techniques jointly recover trend inflation, the NAIRU, and the Phillips-curve slope under two alternative measures of slack: the standard unemployment rate and an extended measure incorporating informal workers. The conventional specification implies a rising NAIRU and persistent inflationary pressure. In contrast, the informality-adjusted NAIRU declines, and the Phillips-curve slope flattens, indicating that informal employment absorbs slack and dampens inflationary dynamics. These results suggest that ignoring informality overstates inflation risks and the power of monetary policy, with significant implications for inflation-targeting frameworks in economies with large informal sectors.

Keywords: NAIRU; Informal employment; Phillips curve; Monetary policy; Inflation dynamics; Emerging markets; State-space model; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: C11 C32 E24 E31 E32 E52 O17 (search for similar items in EconPapers)
Date: 2026-04
New Economics Papers: this item is included in nep-cba, nep-iue and nep-mon
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