Estimation of a time varying NAIRU for New Zealand

Abstract

The focus of this thesis is on the measurement of the constant and time-varying NAIRU (Non-Accelerating Inflation rate of Unemployment) for the 1977-1999 period in New Zealand. The literature suggests that the NAIRU has not been constant over this period. However, because the NAIRU is not directly observable it must be estimated. After reviewing the theoretical framework underlying the most common estimation approaches, Ordinary Least Squares, Recursive Least Squares and Kalman filter, estimations of the constant and time-varying NAIRU are presented. The Kalman filter method provides the most satisfactory results. Possible explanations for the changing NAIRU are also explored. Changes in the demographic composition of the labour force, a rise in labour force participation by women, increased integration of labour markets, increased productivity resulting in higher real wage are some of the factors that are explored as possible influences on the NAIRU over this time. Further research can be done by developing an empirical model of the time-varying NAIRU as a function of a set of proposed explanatory variables in order to quantify the systematic effects of these variables.