Estimating NAIRU in Small Open Economies: Models with Adaptive and Rational Expectations
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| Year of publication | 2008 |
| Type | Appeared in Conference without Proceedings |
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| Description | This paper estimates the NAIRU and output gap in two small open economies (Czech Republic and New Zealand) in a Bayesian framework. The estimates of these unobserved states are made using two models: simple hysteretic model with adaptive expectations and dynamic (non-hysteretic) rational expectations model. Hysteretic model assumes a well known "law of motion" of the equilibrium unemployment. The results show that the hysteresis is a significant phenomenon in the Czech economy. On the other hand, effective and credible inflation targeting monetary policy may cause a false indication of the hysteresis as the estimates for the New Zealand economy show. We estimated three sets of the paths which are in accordance with the natural rate hypothesis, hysteresis hypothesis, and the theory of NAIRU. Bayesian inference allows us to decide which trajectory is the most probable. This may lower the uncertainty related to NAIRU estimation. |
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