Advanced Search
MyIDEAS: Login

History and theory of the NAIRU: a critical review

Contents:

Author Info

  • Marco A. Espinosa-Vega
  • Steven Russell

Abstract

Economic commentators regularly urge the Fed to use the level of unemployment or the rate of change in wages as leading indicators of inflation and as guides to whether they should ease or tighten monetary policy. The logic behind this approach is based on modern (post-1970) Keynesian macroeconomics and, more specifically, on the Phillips curve and the nonaccelerating inflation rate of unemployment (NAIRU). This article attempts to provide some basic information about this NAIRU theory of the causes of inflation and the role of monetary policy. After describing the historical development of the NAIRU theory, the discussion raises some practical questions about the validity of the theory and its usefulness as the basis for policy advice. Perhaps the most important question involves the difficulty of distinguishing policy-induced changes in nominal wages that reflect future changes in the price level from changes in relative wages associated with real changes in the economy. The authors also describe recent developments in neoclassical theory that indicate that business cycle fluctuations in employment and output may be caused primarily by real forces-a situation that, if true, increases the danger that monetary policy based on the NAIRU may interfere with the proper functioning of the price system.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.frbatlanta.org/frbatlanta/filelegacydocs/ACFC1.pdf
Our checks indicate that this address may not be valid because: 404 Not Found. If this is indeed the case, please notify (Meredith Rector)
Download Restriction: no

Bibliographic Info

Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (1997)
Issue (Month): Q 2 ()
Pages: 4-25

as in new window
Handle: RePEc:fip:fedaer:y:1997:i:q2:p:4-25:n:v.82no.2

Contact details of provider:
Postal: 1000 Peachtree St., N.E., Atlanta, Georgia 30309
Phone: 404-521-8500
Email:
Web page: http://www.frbatlanta.org/
More information through EDIRC

Order Information:
Email:

Related research

Keywords: Economics;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Laurence Ball & N. Gregory Mankiw, 1993. "Relative-price changes as aggregate supply shocks," Working Papers 93-13, Federal Reserve Bank of Philadelphia.
  2. Eric M. Leeper & David B. Gordon, 1991. "In search of the liquidity effect," Working Paper 91-17, Federal Reserve Bank of Atlanta.
  3. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
  4. Bhattacharya, Joydeep & Guzman, Mark G. & Smith, Bruce D., 1998. "Some Even More Unpleasant Monetarist Arithmetic," Staff General Research Papers 5084, Iowa State University, Department of Economics.
  5. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  6. Zarnowitz, Victor, 1992. "Business Cycles," National Bureau of Economic Research Books, University of Chicago Press, number 9780226978901, янваÑ.
  7. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  8. Arifovic, Jasmina, 1995. "Genetic algorithms and inflationary economies," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 219-243, August.
  9. James B. Bullard & Steven Russell, 2004. "How costly is sustained low inflation for the U.S. economy?," Review, Federal Reserve Bank of St. Louis, issue May, pages 35-68.
  10. Mark A. Wynne, 1995. "Sticky prices: what is the evidence?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 1-12.
  11. James Tobin, 1980. "Stabilization Policy Ten Years After," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(1, Tenth ), pages 19-90.
  12. Roberto Chang, 1997. "Is low unemployment inflationary?," Economic Review, Federal Reserve Bank of Atlanta, issue Q I, pages 4-13.
  13. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  14. Bruce D. Smith, 1984. "Money and inflation in colonial Massachusetts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  15. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  16. Marco Espinosa & Steven Russell, 1998. "Can a Policy of Higher Inflation Reduce Real Interests in the Long Run?," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 92-103, February.
  17. Neil Wallace, 1984. "Some of the choices for monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win.
  18. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
  19. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
  20. Franco Modigliani & Lucas Papademos, 1975. "Targets for Monetary Policy in the Coming Year," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(1), pages 141-166.
  21. Robert E. Lucas, Jr. & Thomas J. Sargent, 1979. "After Keynesian macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Ieva Rubene & Paolo Guarda, 2004. "The new Keynesian Phillips curve: empirical results for Luxembourg," BCL working papers 11, Central Bank of Luxembourg.
  2. Mariam Camarero & Josep Lluis Carrion Silvestre & Cecilio Tamarit, 2005. "Unemployment dynamics and NAIRU estimates for CEECs : A univariate approach," Working Papers in Economics 131, Universitat de Barcelona. Espai de Recerca en Economia.
  3. Jan Gottschalk, 2002. "Keynesian and Monetarist Views on the German Unemployment Problem � Theory and Evidence," Kiel Working Papers 1096, Kiel Institute for the World Economy.
  4. Dionisio Ramirez & Gabriel Rodríguez, 2013. "Do Labor Reforms in Spain have an Effect on the Equilibrium Unemployment Rate?," Documentos de Trabajo 2013-367, Departamento de Economía - Pontificia Universidad Católica del Perú.
  5. Debelle, Guy & Vickery, James, 1998. "Is the Phillips Curve a Curve? Some Evidence and Implications for Australia," The Economic Record, The Economic Society of Australia, vol. 74(227), pages 384-98, December.
  6. Tao Zha, 1998. "A dynamic multivariate model for use in formulating policy," Economic Review, Federal Reserve Bank of Atlanta, issue Q 1, pages 16-29.
  7. Lynn Elaine Browne, 1999. "U.S economic performance: good fortune, bubble, or new era?," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 3-20.
  8. Arturo Estrella & Frederic S. Mishkin, 1999. "Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty," NBER Chapters, in: Monetary Policy Rules, pages 405-436 National Bureau of Economic Research, Inc.
  9. Victor Claar, 2006. "Is the NAIRU more useful in forecasting inflation than the natural rate of unemployment?," Applied Economics, Taylor & Francis Journals, vol. 38(18), pages 2179-2189.
  10. Bozani, Vasiliki & Drydakis, Nick, 2011. "Studying the NAIRU and its Implications," IZA Discussion Papers 6079, Institute for the Study of Labor (IZA).
  11. Sharon Kozicki, 2001. "Why do central banks monitor so many inflation indicators?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-42.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedaer:y:1997:i:q2:p:4-25:n:v.82no.2. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Meredith Rector).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.