Time-Varying NAIRU and Potential Growth in Japan *1
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This paper demonstrates the time-varying NAIRU approach for estimation of the potential rate of growth, where the latter is defined as the growth rate at which the inflation rate would be neither accelerating nor decelerating. We show theoretically that this inflation-neutral potential rate of growth is determined by three factors: the rate of technological progress, the growth rates of the production factors, and the shift in the NAIRU. We conduct empirical analysis for Japan since the latter half of the 1980s and show that all three factors have contributed to the lowering of the Japanese potential rate of growth since the early 1990s. In particular, we discover that it was the shift in the NAIRU that caused the protracted period of slowdown in Japanese potential growth around the midst of the 1990s. Furthermore, we show that since 2000, with the strengthening of East Asian international competitiveness, Japan has been driven to substantial reform of its old economic structure, and this may have brought about an acceleration of the shift in the NAIRU. We also point out that the NAIRU estimate and its relationship with the inflation rate are subject to various kinds of uncertainty, and thus care should be taken in their evaluation and interpretation.
E3, N1, O1;
output gap, potential growth, NAIRU
- *1 We would like to thank Yoichi Matsubayashi (Wakayama University), and many of the staff of the Research and Statistics Department at the Bank of Japan for their helpful comments. Any remaining errors belong to the authors. The opinions expressed here are those of the authors, and should be ascribed neither to the Bank of Japan nor to the Research and Statistics Department. We can be reached at email@example.com and firstname.lastname@example.org .