The Equilibrium Rate of Unemployment and the Real Exchange Rate: An Unobserved Components System Approach
Riksbank Working Paper No. 221
50 Pages Posted: 4 Mar 2008
Date Written: November 2008
Abstract
A common assumption when analysing unemployment is that the economy is closed. However, the equilibrium rate of unemployment is not identified in an open economy unless the foreign sector is modeled. Therefore we set up and estimate a structural unobserved components open economy model for the unemployment rate and the real exchange rate. This approach enables us to simultaneously determine changes in both cyclical and equilibrium rates in these two variables. The results indicate that the dramatic changes in the Swedish unemployment rate during the 1990s is mainly a cyclical phenomenon. The development of the exchange rate is mainly driven by terms of trade and government deficits.
Keywords: Natural Rate, NAIRU, equilibrium exchange rate, Phillips curve, unobserved-components model
JEL Classification: C32, E24, E31, E32, F31, F41
Suggested Citation: Suggested Citation
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