The NAIRU, unemployment and the rate of inflation in Brazil

Abstract

This paper estimates the Brazilian NAIRU (Nonaccelerating Inflation Rate of Unemployment) and investigates several empirical questions: the stability of coefficients of the Brazilian price Phillips curve, the behavior of the NAIRU along time, and error bands for the NAIRU. This article innovates, with respect to previous research work done for Brazil, because it estimates error bands for the NAIRU and adopts econometric models that, in our judgment, deal more adequately with the still recent instability of the Brazilian economy. We estimate two different state-space models: one with a time-varying NAIRU and another in which the NAIRU is changing over time according to a hidden Markov chain specification. The study presents some new evidence on several questions. It shows that while the slope of the Brazilian price Phillips curve is stable the NAIRU has not been stable. It concludes that there is a statistically significant relationship, with correct sign, between deviations of unemployment from the NAIRU and inflation. It also shows that, after the second semester of 1995, there is no significant evidence that the NAIRU has been different from the observed unemployment rate.

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