But, to build confidence in this result, we would like to be able to tell a qualitative story that explains why NAIRU may have declined and find evidence in labor markets, beyond the time varying parameter estimates of NAIRU, that is consistent with it. The source of the decline in NAIRU will, hopefully, help us to answer a very important related question.
To the extent that there has been a decline in NAIRU, is it likely to be permanent or transitory? This may have important implications for the inflation forecast over the coming year. I am going to develop two sets of explanations for the surprisingly good performance of inflation relative to unemployment.