Author(s): K.Mc Morrow and W. Roeger
In 1968 Friedman put forward the notion of a “natural” rate of unemployment to encapsulate the idea that a “normal” level of unemployment, roughly equivalent to the amount of frictional and structural unemployment, persists even when the labour market is in equilibrium. Since there are no direct measures of the natural rate, as it is essentially a theoretical construct, one must be satisfied with proxy estimates derived using various methods including that which draws on Tobin’s concept of the non-accelerating inflation rate of unemployment (i.e. the Nairu).
The essential objective of the present paper is to produce statistically significant and economically reasonable, time-varying, Nairu estimates (TV-Nairu's) for the Community's Member States which also have informational content in terms of inflation. While it is clearly difficult to estimate Nairu's using variables to cover all the main contributory factors which are likely to be at play, it may nevertheless be possible to isolate the principal "sinners" by selecting a modelling strategy which is both theoretically robust and empirically respectful of a number of key pre-determined criteria, including in particular the inflation tracking performance of the estimated Nairu's / unemployment gaps.