NAIRU estimation of 28 EU-member states

Abstract

The non-accelerating inflation rate of unemployment (NAIRU) is an unemployment rate or range of unemployment rates that produces a stable rate of inflation. NAIRU is usually difficult to estimate since it is a hidden variable. In this thesis, the author allows time-varying NAIRU, and uses a structural model with forward and backward looking Phillips curves to estimate the output gap and unemployment gap. The author finds that in general, the negative relations between unemployment gap and inflation rate are significant across EU-member states. This method of capturing the relationship between unemployment and inflation is better than that of King and Watson’s, implied by the indicators of Pearson’s correlations, and also because of the potential ability of using our method to predict near future inflation rate.