1 Introduction
Owing to its unobservable nature, NAIRU[1], which stands for the nonaccelerating inflation rate of unemployment, has been one of the most controversial concepts in Macroeconomics.[2] A large literature (for example, see the symposium in the Journal of Economic Perspectives (Winter issue, 1997) and Ball and Mankiw, 2002) has been devoted to discuss the usefulness of the NAIRU in forecasting and policy discussion. This paper sets out to estimate whether there is a relationship between the rate of inflation and unemployment and, if so, what that relationship is. That is: at what level of the unemployment rate will wage or price inflation begin to rise?
Comparisons of the current rate of unemployment with estimates of the NAIRU can be used to help gain an impression of spare capacity and the degree of inflationary pressures in the economy. This means that if measures of the NAIRU are robust enough to be informative, they can be important for monetary and fiscal policy, labour market policy, forecasting, and private sector decision making (Gibbs 1995). Over-time, structural changes in the economy may also affect the NAIRU. A NAIRU that varies over-time has important implications in considering inflationary pressures.
Recent studies have attempted to estimate a NAIRU for New Zealand using the Kalman filter technique (see Richardson et al.,2000, and Eaqub and Ward, 2001 ). This paper updates and extends this literature in several ways. This paper extends previous literature by using the Stock and Watson (1998) procedure to estimate the signal-to-noise ratio; including a survey measure of inflation expectations as a variable; estimating the NAIRU for three different measures of inflation and two different models; including measures of short-term shocks significant for New Zealand; and making use of quarterly data up to the end of 2003.
The next section covers important NAIRU concepts before discussing the New Zealand situation, including the possible implications for the NAIRU. Section 3 then discusses theoretical and practical issues around estimating a NAIRU for New Zealand. Section 4 then outlines the models and data used in this paper and the results obtained.
Notes
- [1]NAIRU has traditionally stood for non-accelerating inflation rate of unemployment. However, this is something of a misnomer and what is usually meant is non-increasing inflation rate of unemployment (see Richardson, Boone, Giomo, Meacci, Rae and Turner, 2000).
- [2]It should be noted that it is not government policy that there is a NAIRU.
