Estimating the time varying NAIRU in Iran

Abstract

Purpose - The main purpose of this paper is to provide more accurate estimates of Iran's time varying non-accelerating inflation rate of unemployment (NAIRU) than what already exists in the literature. Design/methodology/approach - Using the Kalman filter approach and annual time series data spanning from 1959 to 2008, the paper presents two estimates of the NAIRU for Iran. Findings - The estimated two measures appear to be robust and consistent in terms of their magnitude and pattern, having a more logical upper limit of 11.1 per cent. Irrespective of which of the two models are considered, the results clearly indicate that overall Iran's NAIRU has been on the rise since the 1960s and whenever the unemployment rate lies below the NAIRU, the rate of inflation has exhibited an explosive behaviour. Such a phenomenon was observed in both 1995-1996 and the post 2006 era. Originality/value - In the context of Iran, all previous studies have consistently over-estimated the maximum value of the time varying NAIRU. In these studies, the NAIRU's upper limit ranges from 14 to 20.7 per cent. The paper concludes that such implausible high rates are as a result of the overestimation associated with misspecification errors in their model.