Estimating the NAIRU using both the Phillips and the Beveridge curves

22/12/2013 |  Elkayam David, Ilek Alex
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The Economy and Economic Activity

We use both the Phillips curve (the relationship between inflation and unemployment) and the Beveridge curve (the relationship between unemployment and job vacancies) to estimate a time-varying NAIRU for Israel in the period from 1998:Q1 to 2012:Q4. After applying prior restrictions on NAIRU volatility, based on economic reasoning, we found that both relationships make a noticeable contribution to the identification of the NAIRU. The estimation results show a prolonged decline of the NAIRU from 2003 until 2012, which could be attributed to government policy that was operated since 2002, which aimed to increase the efficiency of the labor market.

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