Estimating the time-varying NAIRU for Germany and policy implications

This article extends Ball and Mankiw (2002) and applies the Hodrick-Prescott filter (1997) to estimate the time-varying NAIRU for Germany. The slope estimate of the Phillips curve is insignificant when the widely used lagged inflation rate πt-1 is selected as a proxy for the expected inflation rate. The average inflation rate in past 4 years is a better proxy for the expected inflation rate. Estimated NAIRUs with λ = 1000 show a steady rising trend. The estimated NAIRU of 9.84% with λ = 1000 in 2005 is slightly higher than the actual unemployment rate of 9.70% in 2005, suggesting that monetary easing or large deficit spending may cause the inflation rate to accelerate.