Estimating the natural rate of unemployment in euro-area countries with co-integrated systems

Published in "Applied Economics" 2012, vol. 44, no. 10, pp. 1315-1335, DOI information: 10.1080/ 00036846.2010.539548.

Keywords: euro-area unemployment, VECM, permanent-transitory decomposition

Download: Version June 2010. (PDF)

Abstract: Given that for France, Germany, Italy, and the Netherlands the unemployment rates are best classified as I(1), we apply permanent-transitory decompositions based on cointegrated VARs with relevant variables (labor productivity, wages, tax wedges, foreign relative prices) to estimate the time-varying natural unemployment rates. In general all variables seem to matter, and the results are quite different from published OECD Nairus. Our implied unemployment gaps are better than the OECD gaps in predicting unemployment changes and inflation gaps, but they are (except for Italy) as bad as the OECD gaps for forecasting inflation changes.

(Latest update: October 2017)