Estimation of NAIRU with Inflation Expectation Data

SFB 649 Discussion Paper 2015-010

31 Pages Posted: 14 Jul 2015

See all articles by Wolfgang K. Härdle

Wolfgang K. Härdle

Humboldt University of Berlin - Institute for Statistics and Econometrics; Xiamen University - Wang Yanan Institute for Studies in Economics (WISE); Charles University; Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Wei Cui

University College London

Weining Wang

Humboldt University of Berlin

Multiple version iconThere are 2 versions of this paper

Date Written: April 2, 2015

Abstract

Estimating natural rate of unemployment (NAIRU) is important for understanding the joint dynamics of unemployment, inflation, and inflation expectation. However, existing literature falls short of endogenizing inflation expectation together with NAIRU in a model consistent way. We estimate a structural model with forward and backward looking Phillips curve. Inflation expectation is treated as a function of state variables and we use survey data as its noisy observations. Surprisingly, we find that the estimated NAIRU tracks unemployment rate closely, except for the high inflation period (late 1970s). Compared to the estimation without using the survey data, the estimated Bayesian credible sets are narrower and our model leads to better inflation and unemployment forecasts. These results suggest that monetary policy was very effective and there was not much room for policy improvement.

Keywords: NAIRU; New Keynesian Phillips Curve; Infation Expectation

JEL Classification: C32; E31; E32

Suggested Citation

Härdle, Wolfgang K. and Cui, Wei and Wang, Weining, Estimation of NAIRU with Inflation Expectation Data (April 2, 2015). SFB 649 Discussion Paper 2015-010. Available at SSRN: https://ssrn.com/abstract=2630311 or http://dx.doi.org/10.2139/ssrn.2630311

Wolfgang K. Härdle (Contact Author)

Humboldt University of Berlin - Institute for Statistics and Econometrics ( email )

Unter den Linden 6
Berlin, D-10099
Germany

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

A 307, Economics Building
Xiamen, Fujian 10246
China

Charles University ( email )

Celetná 13
Dept Math Physics
Praha 1, 116 36
Czech Republic

Humboldt University of Berlin - Center for Applied Statistics and Economics (CASE)

Unter den Linden 6
Berlin, D-10099
Germany

Wei Cui

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Weining Wang

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

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