NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How Precise are Estimates of the Natural Rate of Unemployment?

Douglas Staiger, James H. Stock, Mark W. Watson

NBER Working Paper No. 5477
Issued in March 1996
NBER Program(s):   EFG   ME

This paper investigates the precision of conventional and unconventional estimates of the natural rate of unemployment (the 'NAIRU'). The main finding is that the NAIRU is imprecisely estimated: a typical 95% confidence interval for the NAIRU in 1990 is 5.1% to 7.7%. This imprecision obtains whether the natural rate is modeled as a constant, as a slowly changing function of time, as an unobserved random walk, or as a function of various labor market fundamentals; it obtains using other series for unemployment and inflation, including additional supply shift variables in the Phillips curve, using monthly or quarterly data, and using various measures for expected inflation. This imprecision suggests caution in using the NAIRU to guide monetary policy.

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Document Object Identifier (DOI): 10.3386/w5477

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