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Title:The (ir)relevance of the NRU for policy making ; the case of Denmark PDF Logo
Authors:Karanassou, Marika
Sala, Hector
Salvador, Pablo F.
Issue Date:2006
Series/Report no.:Working Paper, Department of Economics, Queen Mary, University of London 580
Abstract:We reconsider the central role of the natural rate of unemployment (NRU) in forming policy decisions. We show that the unemployment rate does not gravitate towards the NRU due to frictional growth, a phenomenon that encapsulates the interplay between lagged adjustment processes and growth in dynamic labour market systems. We choose Denmark as the focal point of our empirical analysis and find that the NRU explains only 33% of the unemployment variation, while frictional growth accounts for the remaining 67%. Therefore, our theoretical and empirical findings raise serious doubts as to whether the NRU should play a key instrumental role in policy making.
Subjects:Unemployment, Natural rate of unemployment, Labour market dynamics, Frictional growth, Chain reaction theory
JEL:E22
E24
J21
Document Type:Working Paper
Appears in Collections:Working Paper Series, School of Economics and Finance, Queen Mary, University of London

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