Stochastic shifts in the natural rate of unemployment: evidence from Greece

Abstract

The paper aims at estimating the natural rate of unemployment in Greece. The methodology adopted follows that of Hamilton. It is assumed that the rate of unemployment follows a stochastic process with periodic shifts in the mean and variance. The natural rate is then estimated using a Markov switching process. Empirical evidence is found that the Greek economy switches over time between two regimes: a regime in which the natural rate and the variance of the rate of unemployment are low (the 1970s); and a regime in which both the natural rate and the variance of the rate of unemployment are high (the 1960s, 1980s and 1990s).