A Kalman filter approach to estimating the UK NAIRU

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.

Published on 07 March 2003

In this paper, the Kalman filter method is applied to UK Phillips-curve models and estimates are derived for the NAIRU from 1973 to 2000. The resulting profiles suggest that the NAIRU peaked around the mid-1980s and fell back thereafter. Structural changes in the labour market have reduced inflationary pressure from that source, and we suggest that temporary effects from real import prices and real oil prices were an important additional downward influence on inflation in the latter half of the 1990s. Some of the uncertainties around our NAIRU estimates are shown. But, even though there may be uncertainty about exactly where the NAIRU is, a variety of models suggest that unemployment was below the NAIRU for much of the second half of the 1990s.