Estimating a New Zealand NAIRU (WP 04/10)

Abstract

This paper estimates the non-increasing inflation rate of unemployment or NAIRU for New Zealand. A NAIRU that varies over time has important implications in considering inflationary pressures. This paper estimates the time-varying NAIRU using a Kalman filter on a reduced form approach and extends previous studies in several ways. Using different model specifications and dependent variables suggests a band of NAIRU estimates of between four and five percent (with further error bands around that). The results of this paper indicate that the NAIRU is a relevant concept and the unemployment gap should be one of the factors considered when assessing inflationary pressure.

Acknowledgements

The authors would like to thank Mark Blackmore, Paul Gardiner, Özer Karagedikli, and Richard Downing for helpful suggestions at the initial stages of this research project. We would also like to thank Thomas Laubach and David Rae for providing us with files and data used in their studies. We are grateful to Özer Karagedikli, Paul Gardiner, Richard Downing, Khoon Goh, Angela Huang, Brendon Riches, Tony Booth, Peter Mawson, Brian Silverstone, Bob Buckle and Veronica Jacobsen for useful comments on drafts of this paper.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury. The New Zealand Treasury takes no responsibility for any errors or omissions in, or for the correctness of, the information contained in this Working Paper. The paper is presented not as policy, but to inform and stimulate wider debate.