The main objective of this paper is to provide more accurate estimates of Iran’s time varying
Non-Accelerating Inflation Rate of Unemployment (NAIRU) than what already exists in the
literature. Using the Kalman filter approach and annual time series data spanning from 1959
to 2008, we present two estimates of the NAIRU for Iran. Our estimated two measures appear
to be robust and consistent in terms of their magnitude and pattern, having a more logical
upper limit of 11.1 per cent. Irrespective of which of the two models are considered, our
results clearly indicate that (a) overall Iran’s NAIRU has been on the rise since the 1960s; (b)
whenever the unemployment rate lies below the NAIRU, the rate of inflation has exhibited an
explosive behaviour. Such a phenomenon was observed in both 1995-1996 and the post 2006
era. In the context of Iran all previous studies have consistently over-estimated the maximum
value of the time varying NAIRU. In these studies the NAIRU’s upper limit ranges from 14
per cent to 20.7 per cent. In this paper we conclude that such implausible high rates are as a
result of the overestimation associated with misspecification errors in their model.