Explaining the time-varying Nairu in the Euro Area - Produits Statistical working papers

This paper analyses the Nairu in the Euro Area and the influence that real interest rates had on its development. Using the Kalman-filter technique we find that the Nairu has varied considerably since the early seventies. The Kalman-filter technique is applied here for the first time using explicit exogenous variables. Among the exogenous variables tested for real interest rates were found to have the largest effect and to explain 40 % to 50 % of the increase in the Nairu between 1975 and the early nineties. Keywords: Nairu, real interest rate, Kalman filter, Phillips curve.