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The NAIRU controversy

The NAIRU controversy. NAIRU , to repeat, is an acronym for “non-accelerating inflation rate of unemployment” The NAIRU is unemployment rate corresponding to unchanging inflation , not zero inflation. Is the NAIRU a useful concept? Stiglitz says “yes”. a. Stiglitz's views.

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The NAIRU controversy

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  1. The NAIRU controversy • NAIRU, to repeat, is an acronym for “non-accelerating inflation rate of unemployment” • The NAIRU is unemployment rate corresponding to unchanging inflation , not zero inflation. Is the NAIRU a useful concept?Stiglitz says “yes”

  2. a Stiglitz's views • The NAIRU is useful because • It provides an explanation of inflation. • It provides a method of predicting inflation. • It is a useful guideline for macroeconomic policy. aJoseph Stiglitz. “Reflections on the Natural Rate Hypothesis,” Journal of Economic Perspectives, Winter 1997, pp. 3-10

  3. Theory behind the NAIRU The NAIRU is supposed to describea situation of labor market equilibrium.If labor markets are “out” of equilibrium--i.e.,then real wage demands are not consistentwith the prevailing set of prices. “The natural rate hypothesis views changes in the inflation rate as a labor market phenomenon whose magnitude can be proxied by a particular measure of labor market slack: the unemployment rate”[4].

  4. NAIRU as an empirical regularity • “I believe the unemployment rate is a good predictor of the inflation rate”[4]. • Since 1960, inflation rose in 26 of 32 quarters that U was below 5%, but fell in 24 of 27 quarters that U was above 7%. • “This empirical regularity is very strong. It suggests an upper bound to our uncertainty about the NAIRU: it looks as if it has been contained within 5 and 7 percent for the period 1960 to the present” [5].

  5. What can explain this? The NAIRU isnot one of the Universe’sconstants If stands to reason that there is a NAIRU for subgroups and that the NAIRU for teenagers or less experienced workers would be higher than the NAIRU for older, more experienced workers. Hence demographic changes in the labor force in the 90s have had the effect of reducing the NAIRU. Stiglitz also notes “general increase in the competitiveness of product and labor markets” that has kept wage increases in line with productivity.

  6. What does the Phillips curve really look like? And why does it matter? Linear Convex Inflation 3.2 Inflation 3.9 2 2 3.9 5.1 3.9 5.1 Unemployment rate Unemployment rate

  7. Concavity diminishesthe risks associatedwith policy experimentation Concave 2.6 Inflation 2 0 3.9 5.1 Unemployment rate

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