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Uncertainties surrounding natural rate estimates in the G7

Cross, R.B. and Darby, J. and Ireland, J.M. (2007) Uncertainties surrounding natural rate estimates in the G7. In: Quantitative Economic Policy: Essays in Honour of Andrew Hughes Hallett. Advances in Computational Economics, 20 . Springer, Berlin, Germany, pp. 337-363. ISBN 3540746838

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Abstract

It is four decades since Phelps (1967) and Friedman (1968) unveiled the natural rate of unemployment hypothesis, and the concept of an equilibrium rate of unemployment is central to the prevailing theories of labour market behaviour and the relationship between unemployment and inflation. Moreover, the natural rate and associated unemployment gaps are seen as important reference points, typically as part of a broad range of indicators, by policy makers who need to assess short-term inflation developments and/or consider appropriate decompositions of fiscal balances into their structural and cyclical components. Yet, as surveys and symposia have illustrated (Bean 1994, Cross 1995, Journal of Economic Perspectives 1997), there remains much uncertainty both about which factors do and do not determine equilibrium rates of unemployment, and about the corresponding numerical values.