Description: Labor-Public-Applied Economics Workshop

Location: 368A Heady Hall

Contact: John Winters

Title: Evaluating NAIRU and Its Determinants in Developing Economies: An In-depth Analysis of Pakistan

Abstract: Amid rising inflation and unemployment in developing economies, this study estimates Pakistan’s NAIRU and examines its key determinants, addressing the constraints posed by limited data. Drawing on annual data from 1972 to 2022, the analysis considers inflation, unemployment, supply shocks, and potential drivers of the NAIRU. In a linear state-space framework, the Kalman filter is employed to estimate the NAIRU, its confidence bounds, and the Phillips curve. Three different inflation indicators and two variants of the Phillips curve, the New Keynesian and Triangular models are used to facilitate alternative state-space specifications. Using Ordinary Least Squares with Newey–West standard errors, the study investigates NAIRU’s determinants, employing both the NAIRU series generated here and those derived from earlier study. Research findings reveal mixed support for the Phillips curve but confirm significant inflation hysteresis, necessitating more robust long-term policies to address entrenched inflation expectations. Core inflation is more responsive to demand gaps than headline measures, offering more precise policy guidance for the monetary authority. The impact of import prices, terms of trade, and labor productivity shocks on inflation highlights the importance of balanced commercial policies, improved labor productivity, and exchange rate stability. NAIRU series estimated averages are between five to six percent with a range of 0.64 to 3.12 points. Significant drivers of NAIRU include GDP growth, trade conditions, and youth labor participation, underscoring the need for economic growth and youth employment initiatives. Limited effects on NAIRU from capital, interest rates, and wages indicate a need for industrial and labor reforms.