The NAIRU, Potential Output, and Okun’s Law: Postwar USA, UK, and Japan

In the previous chapter we estimated the NAIRU (non-accelerating inflation rate of unemployment, which is synonymous with the natural rate of unemployment)1 and potential output for postwar Japan using annual data. In that chapter, we left the following three points for future work. These are (i) to examine the relative merits of using, as a generator of inflation, either the GDP deflator, the consumer price index, or the wholesale price index; since potential output is a concept relating to GDP, a reasonable choice would be the first one, but one may need a formal criterion for comparing among the three indexes, (ii) to endogenously estimate error variances of an observation equation and a transition equation (or transition equations) of Kalman filter models,2 and (iii) to handle the quarterly data, which will facilitate the work mentioned in point (ii).