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

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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 co-integrated Vector Autoregressions (VAR) with relevant variables (labour 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 Organization for Economic Co-operation and Development (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.

Document Type: Research Article


Affiliations: Macroeconomic Policy Institute (IMK) Hans Boeckler Foundation, Hans-Böckler-Str. 39D-40476 Düsseldorf, Germany

Publication date: April 1, 2012

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