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Challenges to the natural rate framework

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  • Stuart E. Weiner

Abstract

By most estimates, the U.S. unemployment rate is currently below its \\"natural rate.\\" The implication is the economy is operating at an unsustainably high level of resource utilization. Capacity levels are being strained, tending to put upward pressure on wages and prices. In anticipation of these rising inflationary pressures, the Federal Reserve has firmed monetary policy several times over the past year.> A majority of mainstream economists appear comfortable with the natural rate framework, in part because it has tracked inflation successfully over the past 35 years. Despite its excellent record, however, the natural rate framework has not been without critics. In the past year, nonbelievers have advanced a number of arguments for why mounting inflationary pressures should not be a concern at this time. These arguments have focused on the heightened globalization of the marketplace, the weak bargaining position of the labor force, widespread productivity gains, and the absence to date of an unambiguous rise in inflation.> In this article, adapted from presentations made to the National Economists Club and the Congressional Budget Office in February 1995, Weiner considers the arguments against the natural rate framework. He offers some counterarguments and concludes that concerns about future inflationary pressures are well founded.

Suggested Citation

  • Stuart E. Weiner, 1995. "Challenges to the natural rate framework," Economic Review, Federal Reserve Bank of Kansas City, vol. 80(Q II), pages 19-25.
    • Handle: RePEc:fip:fedker:y:1995:i:qii:p:19-25:n:v.80no.2
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    File URL: https://www.kansascityfed.org/documents/1200/1995-Challenges%20to%20the%20Natural%20Rate%20Framework.pdf
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    References listed on IDEAS

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    1. C. Alan Garner, 1994. "Capacity utilization and U.S. inflation," Economic Review, Federal Reserve Bank of Kansas City, vol. 79(Q IV), pages 5-21.
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    Cited by:

    1. Tito Nícias Teixeira da Silva Filho, 2008. "Searching for the Natural Rate of Unemployment in a Large Relative Price Shocks' Economy: the Brazilian Case," Working Papers Series 163, Central Bank of Brazil, Research Department.
    2. Todd E. Clark, 1998. "Progress toward price stability : a 1997 inflation report," Economic Review, Federal Reserve Bank of Kansas City, vol. 83(Q I), pages 5-21.
    3. Todd E. Clark, 1997. "U.S. inflation developments in 1996," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 11-30.

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    Keywords

    Inflation (Finance); Unemployment;

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