The NAIRU, Potential Output, and the Kalman Filter: A Survey and Method of Estimation

The concepts of NAIRU (non-accelerating inflation rate of unemployment) and potential output have received increasing attention recently as the rate of inflation has occupied a higher position in monetary policy discussion. This seems particularly true as more central banks of various economies regard inflation as a main targeting variable in their policy operations (Bernanke and Mishkin (1997)). For, if the central bank can correctly forecast the future course of the NAIRU and if it can steer the economy to that position, then the policy authority can obtain a stable rate of inflation. In addition, if it can control the growth of money supply, at least in the medium-term horizon, the rate of inflation of the economy would be controlled at a low and stable level.