ZEW Discussion Papers
Will the (German) NAIRU Please Stand up?
Franz, Wolfgang (2003), Will the (German) NAIRU Please Stand up?, ZEW Discussion Paper No. 03-35, Mannheim. Download
This paper deals with a critical assessment and a reestimation of the \non{accelerating in
ation rate of unemployment" (NAIRU) for Germany.
There are quite a few obstacles to perceiving the NAIRU as an understandable and easy{to{use analytical instrument,
suitable for economic policy: the possibility of a non{vertical Phillips curve (e.g. in times of low in
ation), the occurrence of shocks and hysteresis effects, the
(mis{)measurement of important variables such as in
ation expectations, cointegration issues, and a time variability of the NAIRU and its confidence intervals. Despite many serious caveats a new attempt is made to estimate a NAIRU for Germany based on conventional Phillips curves as well as on new approaches such as using direct measures of in ationary expectations, the Kalman filter method, and the residual{based bootstrap procedure (in order to estimate confidence intervals).
However, by any method, simple or complex, the NAIRU is very hard to determine and subject to considerable arbitrariness.
Keywords: NAIRU, unemployment, inflation, Phillips curve, natural rate, hysteresis, supply shocks, inflation expectations, Kalman filter, bootstrap
