How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland
This paper estimates the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) for Iceland based on the Phillips curve using an iterative regression process and the Kalman filter. According to our results, the NAIRU rose sharply in the wake of the financial crisis, peaking at 5½% or 7% dependi...
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ftrepec:oai:RePEc:ice:wpaper:wp64 2024-04-14T08:13:36+00:00 How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland Bjarni G. Einarsson Jósef Sigurdsson http://www.cb.is/library/Skr%C3%A1arsafn---EN/Research/Working%20Paper%20No%2064.pdf unknown http://www.cb.is/library/Skr%C3%A1arsafn---EN/Research/Working%20Paper%20No%2064.pdf preprint ftrepec 2024-03-19T10:38:10Z This paper estimates the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) for Iceland based on the Phillips curve using an iterative regression process and the Kalman filter. According to our results, the NAIRU rose sharply in the wake of the financial crisis, peaking at 5½% or 7% depending on estimation methodology. We evaluate what factors influence changes in the NAIRU. In particular, we assess whether changes in the NAIRU have been influenced by structural changes or changes in actual unemployment and therefore aggregate demand; i.e., whether there is evidence of hysteresis in unemployment. We find that time variation in the NAIRU is to a large extent due to hysteresis effects but to a lesser extent due to structural factors. This implies that monetary policy can have long-run effects on unemployment and its conduct is thus more complicated. Prudence in the government’s conduct of fiscal policy and labor unions’ and their counterparties’ wage bargaining becomes more important in the presence of hysteresis in unemployment, as inflationary pressures must be countered with a rise in interest rates, which can cause an increase in the NAIRU. Keeping inflation low becomes more important for the real economy in the presence of hysteresis in unemployment. Report Iceland RePEc (Research Papers in Economics) |
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RePEc (Research Papers in Economics) |
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description |
This paper estimates the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) for Iceland based on the Phillips curve using an iterative regression process and the Kalman filter. According to our results, the NAIRU rose sharply in the wake of the financial crisis, peaking at 5½% or 7% depending on estimation methodology. We evaluate what factors influence changes in the NAIRU. In particular, we assess whether changes in the NAIRU have been influenced by structural changes or changes in actual unemployment and therefore aggregate demand; i.e., whether there is evidence of hysteresis in unemployment. We find that time variation in the NAIRU is to a large extent due to hysteresis effects but to a lesser extent due to structural factors. This implies that monetary policy can have long-run effects on unemployment and its conduct is thus more complicated. Prudence in the government’s conduct of fiscal policy and labor unions’ and their counterparties’ wage bargaining becomes more important in the presence of hysteresis in unemployment, as inflationary pressures must be countered with a rise in interest rates, which can cause an increase in the NAIRU. Keeping inflation low becomes more important for the real economy in the presence of hysteresis in unemployment. |
format |
Report |
author |
Bjarni G. Einarsson Jósef Sigurdsson |
spellingShingle |
Bjarni G. Einarsson Jósef Sigurdsson How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland |
author_facet |
Bjarni G. Einarsson Jósef Sigurdsson |
author_sort |
Bjarni G. Einarsson |
title |
How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland |
title_short |
How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland |
title_full |
How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland |
title_fullStr |
How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland |
title_full_unstemmed |
How "Natural" is the Natural Rate? Unemployment Hysteresis in Iceland |
title_sort |
how "natural" is the natural rate? unemployment hysteresis in iceland |
url |
http://www.cb.is/library/Skr%C3%A1arsafn---EN/Research/Working%20Paper%20No%2064.pdf |
genre |
Iceland |
genre_facet |
Iceland |
op_relation |
http://www.cb.is/library/Skr%C3%A1arsafn---EN/Research/Working%20Paper%20No%2064.pdf |
_version_ |
1796311612704948224 |