SFB649DP2015 010
Estimation of NAIRU with Inflation Expectation Data
Wei Cui
Wolfgang K. Härdle
Weining Wang
Abstract:
Estimating natural rate of unemployment (NAIRU) is important for understanding
the joint dynamics of unemployment, inflation, and inflation expectation. However,
existing literature falls short of endogenizing inflation expectation together with NAIRU
in a model consistent way. We estimate a structural model with forward and backward
looking Phillips curve. Inflation expectation is treated as a function of state variables
and we use survey data as its noisy observations. Surprisingly, we find that the estimated
NAIRU tracks unemployment rate closely, except for the high inflation period
(late 1970s). Compared to the estimation without using the survey data, the estimated
Bayesian credible sets are narrower and our model leads to better inflation and unemployment
forecasts. These results suggest that monetary policy was very effective and
there was not much room for policy improvement.
Keywords:
NAIRU, New Keynesian Phillips Curve, Inflation Expectation
JEL Classification:
C32, E31, E32