Is estimating the NAIRU like searching for a will o’ the wisp? The Canadian case
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Date
2024-08
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University of New Brunswick
Abstract
In 1992, Setterfield, Gordon, and Osberg published a seminal article in the European Economic Review, argued that varying measurement approaches significantly impact Non-Accelerating Inflation Rate of Unemployment (NAIRU) estimates. He likens the search for NAIRU to chasing a will o’ the wisp. This study replicates Setterfield's methodology, utilizing a steady-state wage equation and a markup price equation to estimate NAIRU. While adhering closely to Setterfield's approach, this study differs by using data from 1997 to 2023, incorporating cost-push factors from imported intermediate inputs, and testing for stationarity, alongside rigorous diagnostic tests. Many regression variants were rejected due to failing these tests, but those that passed showed remarkably consistent NAIRU estimates. This raises the question of whether Setterfield's conclusion—that finding NAIRU is elusive—was influenced by using equations that would not pass diagnostic scrutiny. The tentative conclusion here is that the NAIRU is relatively well-defined and not a will o’ the wisp at all.