The Phillips curve, regime switching, and the NAIRU

This paper explores the impact of nonlinearities in the Phillips curve and its representation by means of a regime switching model on the meaning and the usefulness of the NAIRU. By implementing a regime switching model that can endogenously generate fluctuations in inflation and in the rate of unemployment, we conclude that the NAIRU is not necessarily a single value, is not necessarily reachable, and is very difficult to measure. The model yields a "neutral rate", which is more an interval of values than a precise number. Furthermore, by postulating dynamic interdependence between real and monetary aspects, the model weakens the theoretical basis of the NAIRU concept itself. (C) 2001 Elsevier Science B.V. All rights reserved.