Whatever Happened to Goldilocks? The Role of Expectations in Estimates of the NAIRU in the Us and the UK

35 Pages Posted: 8 May 2006

See all articles by Rebecca L. Driver

Rebecca L. Driver

affiliation not provided to SSRN

Jennifer V. Greenslade

Bank of England - External MPC Unit

Richard G. Pierse

University of Surrey - Department of Economics; National Institute of Economic and Social Research (NIESR)

Abstract

During the second half of the 1990s the US economy was characterized as the Goldilocks economy: not too hot, nor too cold, but just right. It was argued that this represented a new paradigm, enabling unemployment to remain low without igniting inflationary pressure. We examine the evidence for a change in the relationship between inflation and unemployment for the US and UK using Phillips curve models. The impact of including explicit inflation expectations is also considered. Inflation expectations are found to play an important role, particularly in the US. When expectations are included there is still evidence that the non-accelerating inflation rate of unemployment (NAIRU) steadily declined during the late 1990s, although this decline in the US NAIRU is not found solely in the 1990s.

Suggested Citation

Driver, Rebecca L. and Greenslade, Jennifer V. and Pierse, Richard G., Whatever Happened to Goldilocks? The Role of Expectations in Estimates of the NAIRU in the Us and the UK. Oxford Bulletin of Economics & Statistics, Vol. 68, No. 1, pp. 45-79, February 2006. Available at SSRN: https://ssrn.com/abstract=881123 or http://dx.doi.org/10.1111/j.1468-0084.2006.00152.x

Rebecca L. Driver (Contact Author)

affiliation not provided to SSRN

Jennifer V. Greenslade

Bank of England - External MPC Unit ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Richard G. Pierse

University of Surrey - Department of Economics ( email )

Guildford
Surrey GU2 7XH
United Kingdom

National Institute of Economic and Social Research (NIESR) ( email )

2 Dean Trench Street
Smith Square
London SW1P 3HE
United Kingdom

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