Measuring the NAIRU with Reduced Uncertainty: A Multiple Indicator-Common Component Approach

32 Pages Posted: 25 Sep 2004

See all articles by Arabinda Basistha

Arabinda Basistha

West Virginia University - College of Business & Economics

Richard Startz

UCSB

Date Written: September 2004

Abstract

Standard estimates of the NAIRU or natural rate of unemployment are subject to considerable uncertainty. We show in this paper that using multiple indicators to extract an estimated NAIRU cuts in half uncertainty as measured by variance. The inclusion of an Okun's Law relation is particularly valuable. We estimate the NAIRU as an unobserved component in a state-space model and show that using multiple indicators reduces both parametric uncertainty and filtering uncertainty. Additionally, our multivariate approach overcomes the "pile-up" problem observed by other investigators.

Keywords: NAIRU, unemployment, inflation, parametric uncertainty, filtering uncertainty

JEL Classification: C32, E31, E32

Suggested Citation

Basistha, Arabinda and Startz, Richard, Measuring the NAIRU with Reduced Uncertainty: A Multiple Indicator-Common Component Approach (September 2004). Available at SSRN: https://ssrn.com/abstract=595563 or http://dx.doi.org/10.2139/ssrn.595563

Arabinda Basistha (Contact Author)

West Virginia University - College of Business & Economics ( email )

Morgantown, WV 26506-6025
United States

Richard Startz

UCSB ( email )

Department of Economics
University of California
Santa Barbara, CA 93106-9210
United States
805-893-2895 (Phone)

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