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Measuring the Nairu with Reduced Uncertainty: A Multiple-Indicator Common-cycle Approach
Arabinda Basistha and Richard Startz
The Review of Economics and Statistics
Vol. 90, No. 4 (Nov., 2008), pp. 805-811
Published by: The MIT Press
Stable URL: http://www.jstor.org/stable/40043116
Page Count: 7
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Standard estimates of the NAIRU or natural rate of unemployment are subject to considerable uncertainty. We show in this paper that using multiple indicators to extract an estimated NAIRU cuts in half uncertainty as measured by variance and gives a 33% reduction in the confidence band. The inclusion of an Okun's Law relation is particularly valuable. The essential notion is the existence of a common cyclical force driving the macroeconomic variables. Model comparisons based on the use of Bayes factors favor the idea of a common cyclical component.
The Review of Economics and Statistics © 2008 The MIT Press