TY  - JOUR
AU  - Estrella,Arturo
AU  - Mishkin,Frederic S.
TI  - Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6518
PY  - 2000
Y2  - September 2000
UR  - http://www.nber.org/papers/w6518
L1  - http://www.nber.org/papers/w6518.pdf
N1  - Author contact info:
Arturo Estrella
Department of Economics
Rensselaer Polytechnic Institute
Troy, NY  12180
Tel: 518-276-2049
E-Mail: estrea@rpi.edu

Frederic S. Mishkin
Columbia University
Graduate School of Business
Uris Hall 817
3022 Broadway
New York, NY 10027
Tel: 212-854-3488
Fax: 212/662-8474
E-Mail: fsm3@columbia.edu
M1  - published as Arturo Estrella, Frederic S. Mishkin. "Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty ," in John B. Taylor, editor, "Monetary Policy Rules" University of Chicago Press (1999)

AB  - In this paper we rethink the NAIRU concept and examine whether it might have a useful role in monetary policy.  We argue that it can, but success depends critically on defining NAIRU as a short-run concept and distinguishing it from a long-run concept like the natural rate of unemployment.  We examine what effect uncertainty has on the use of NAIRU in policy.  Uncertainty about the level of NAIRU does not imply that monetary policy should react less to the NAIRU gap.  However, uncertainty about the effect of the NAIRU gap on inflation does require adjustments to the policy reaction function.  Also, as in Brainard (1967), uncertainty about the effect of the monetary policy instrument on the NAIRU gap reduces the magnitude of the policy response.  We estimate a simple NAIRU gap model for the United States to obtain quantitative measures of uncertainty and to assess how these measures affect our view of the policy reaction function.
ER  -