Whatever Happened to Goldilocks? The Role of Expectations in Estimates of the NAIRU in the US and the UK

During the second half of the 1990s the US economy was characterized as the Goldilocks economy: not too hot, nor too cold, but just right. It was argued that this represented a new paradigm, enabling unemployment to remain low without igniting inflationary pressure. We examine the evidence for a cha...

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Bibliographic Details
Published in:Oxford bulletin of economics and statistics 2006-02, Vol.68 (1), p.45-79
Main Authors: Driver, Rebecca L., Greenslade, Jennifer V., Pierse, Richard G.
Format: Article
Language:English
Subjects:
Business cycles
Correlation analysis
Data analysis
E24
E31
Economic conditions
Economic fluctuations
Economic impact
Empirical tests
Expectations
Inflation
Labour economics
Macroeconomics
NAIRU
Phillips curve
Rational expectations
Studies
U.S.A
Unemployment
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Summary:During the second half of the 1990s the US economy was characterized as the Goldilocks economy: not too hot, nor too cold, but just right. It was argued that this represented a new paradigm, enabling unemployment to remain low without igniting inflationary pressure. We examine the evidence for a change in the relationship between inflation and unemployment for the US and UK using Phillips curve models. The impact of including explicit inflation expectations is also considered. Inflation expectations are found to play an important role, particularly in the US. When expectations are included there is still evidence that the non‐accelerating inflation rate of unemployment (NAIRU) steadily declined during the late 1990s, although this decline in the US NAIRU is not found solely in the 1990s.
ISSN:0305-9049
1468-0084
DOI:10.1111/j.1468-0084.2006.00152.x