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

49 Pages Posted: 12 Jul 2000

See all articles by Arturo Estrella

Arturo Estrella

Frederic S. Mishkin

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: September 2000

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.

Suggested Citation

Estrella, Arturo and Mishkin, Frederic S., Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty (September 2000). NBER Working Paper No. w6518, Available at SSRN: https://ssrn.com/abstract=226257

Frederic S. Mishkin (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

No contact information is available for Arturo Estrella

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
38
Abstract Views
1,279
PlumX Metrics