In Search of the Natural Rate of Unemployment

41 Pages Posted: 15 Dec 2004

See all articles by Thomas B. King

Thomas B. King

Federal Reserve Bank of Chicago

James Morley

University of Sydney

Date Written: August 2003

Abstract

We use a structural-VAR model to estimate the steady-state rate of unemployment, which we define as the natural rate. Although nothing constrains it to do so, the natural rate measured by this approach implies a strong negative relationship between cyclical unemployment and inflation, adding to the empirical evidence for a short-run Phillips Curve. Meanwhile, the natural rate appears to be more volatile than previous estimates and, indeed, accounts for the bulk of the variation in the U.S. unemployment rate over the past 50 years. Much of the variation in the natural rate can be related to structural factors consistent with search-based equilibrium models of employment.

Keywords: Unemployment, natural rate, structural VAR, Phillips Curve, NAIRU

JEL Classification: E24, E32, J64

Suggested Citation

King, Thomas B. and Morley, James, In Search of the Natural Rate of Unemployment (August 2003). Available at SSRN: https://ssrn.com/abstract=631244 or http://dx.doi.org/10.2139/ssrn.631244

Thomas B. King (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

James Morley

University of Sydney ( email )

Rm 370 Merewether (H04)
Sydney, NSW 2006 2008
Australia

HOME PAGE: http://https://sites.google.com/site/jamescmorley/

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