What is NAIRU?

NAIRU is the specific level of unemployment whereby the economy does not cause inflation to increase. NAIRU is a study of the historical relationship between unemployment and inflation and represents the specific level of unemployment before prices tend to rise or fall.

How is the NAIRU level estimated?

The NAIRU level is estimated based on the historical relationship between the rates of unemployment and the rate of inflation, and the metrics are known to vary over time, resulting in varied outcomes at any given time.

What is the relationship between NAIRU and inflation?

In the event that the actual rate of employment matches the NAIRU level, the rate of inflation will remain constant. When the Federal Reserve is conducting monetary policy, the NAIRU level represents the lowest level to which the unemployment rate can fall before the rate of inflation starts to rise.

What happens when the unemployment rate and NAIRU are equal?

Theory Properties. If the actual unemployment rate is greater than the Nairu, inflationary expectations fall so the inflation rate slows down and there is disinflation. If both the unemployment rate and Nairu are equal, the inflation rate tends to stay the same.

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