Faculty of Economics and Business Administration Publications Database

NAIRU Uncertainty and Nonlinear Policy Rules

Meyer, Laurence H.
Swanson, Eric T.
Volume: 91
Number: 2
Pages: 226 - 231
Month: May
Year: 2001
Keywords: Unemployment; Inflation; Finance; Economic indicators

This article examines non-accelerating-inflation rate of unemployment (NAIRU) uncertainty and nonlinear policy rules in the U.S. Core inflation in the U.S. declined from the end of 1995 through the end of 1999 and has remained modest thereafter despite persistent above-trend growth and a decline in the unemployment rate to a level well below earlier estimates of the (NAIRU). It has been suggested that episodes of heightened uncertainty about the NAIRU may warrant a nonlinear policy response to changes in the unemployment rate. In such circumstances, policy makers initially attenuate their response to changes in the unemployment rate, but return to a more aggressive policy response when the unemployment rate falls far enough that policymakers regain confidence that it lies below the NAIRU. In the article, the authors attempt to formalize such a nonlinear policy rule and test its performance when there is heightened uncertainty about the NAIRU. To illustrate the basic point of the paper without introducing unnecessary complications, the authors use a simple backward-looking model.