Measuring The UK Short-Run NAIRU

These papers report on research carried out by, or under the supervision of, the external members of the Monetary Policy Committee (MPC) and their economic staff.
Published on 01 April 2003

External MPC Unit Discussion Paper No. 12 

Nicoletta Batini and Jennifer Greenslade

This paper derives alternative measures of the short-run NAIRU (SRN) for the UK, the rate for unemployment at which inflation will neither increase nor decrease in the short-run. We estimate the NAIRU jointly with price equations by using the Kalman filter. Our work suggests that both structural changes in the labour market and favourable supply shocks may have had a beneficial impact on RPIX inflation over the last few years. We show that deviations of unemployment from the short-run NAIRU measures prove helpful in predicting inflation and we demonstrate their usefulness in Taylor-type policy rules for the interest rate.

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