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The NAIRU in Israel: an Unobserved Components Approach

Author

Listed:
  • Tanya Suchoy

    (Bank of Israel)

  • Amit Friedman

    (Bank of Israel)

Abstract

The Non Accelerating In‡ation Rate of Unemployment (NAIRU) is estimated for the post-stabilization period, as an unobserved stochastic variable, using state-of-the-art State Space Models. The NAIRU is identi- …ed by a Phillips curve equation, and is assumed to follow a random walk. The basic model is augmented by an equation that captures the persistence of the unemployment gap. We also use the joint system that was …rst introduced by Apel and Jansson (1999) in order to estimate potential output and the NAIRU simultaneously. Con…dence intervals around the NAIRU were computed by jackknife technique. The results indicate that the actual variation of unemployment has only a minor e¤ect on the NAIRU, which remained relatively stable throughout the sample period. The state variables have su¢ciently stable characteristics to be successfully predicted, at least one step ahead. However, policy implications that may be derived are sometimes limited, as the uncertainty around the estimated NAIRU is substantial. No evidence for hysteresis were found. The estimates show that the disin‡ation process during the 1990s did not cause an increase in the NAIRU.

Suggested Citation

  • Tanya Suchoy & Amit Friedman, 2002. "The NAIRU in Israel: an Unobserved Components Approach," Bank of Israel Working Papers 2002.08, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2002.08
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    References listed on IDEAS

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