The Equilibrium Rate of Unemployment and the Real Exchange Rate: An Unobserved Components System Approach

Riksbank Working Paper No. 221

Riksbank Research Paper Series No. 52

50 Pages Posted: 4 Mar 2008

See all articles by Hans Lindblad

Hans Lindblad

Sveriges Riksbank - Economics Department

Peter Sellin

Sveriges Riksbank

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

Lindblad, Hans and Sellin, Peter, The Equilibrium Rate of Unemployment and the Real Exchange Rate: An Unobserved Components System Approach (November 2008). Riksbank Working Paper No. 221, Riksbank Research Paper Series No. 52, Available at SSRN: https://ssrn.com/abstract=1099942 or http://dx.doi.org/10.2139/ssrn.1099942

Hans Lindblad

Sveriges Riksbank - Economics Department ( email )

S-103 37 Stockholm
Sweden

Peter Sellin (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
37 Stockholm
Sweden

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