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Is low unemployment inflationary?

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  • Roberto Chang

Abstract

Many discussions about current macroeconomic events are based on the premise that inflation must accelerate after unemployment falls below a certain value. That value, called the nonaccelerating inflation rate of unemployment, or NAIRU, is believed to be around 6 percent, suggesting that recent unemployment rates are too low for stable inflation. But in fact inflation has been low and stable for several years. ; This article argues that the concept of the NAIRU is of very limited use for predicting inflation, understanding its causes, or forming policy. Such is the implication of empirical evidence showing that the NAIRU is highly variable and that its location cannot be estimated with sufficient precision to know whether unemployment is above or below it. In addition, contemporary economic theory implies that a fall in unemployment may or may not be associated with higher inflation, depending on the fundamental causes of unemployment movements. Those fundamental causes can be identified, but then a comparison between observed unemployment and the NAIRU provides no additional useful information about future changes in inflation.

Suggested Citation

  • Roberto Chang, 1997. "Is low unemployment inflationary?," Economic Review, Federal Reserve Bank of Atlanta, issue Q I, pages 4-13.
  • Handle: RePEc:fip:fedaer:y:1997:i:qi:p:4-13:n:v.86no.1
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    References listed on IDEAS

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    1. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678-678.
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    Cited by:

    1. Céspedes Reynaga, Nikita, 2003. "Factores cíclicos y estructurales en la evolución de la tasa de desempleo," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 9, pages 199-221.
    2. 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.
    3. Marco A. Espinosa-Vega & Steven Russell, 1997. "History and theory of the NAIRU: a critical review," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 4-25.
    4. 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.
    5. Rudy Fichtenbaum, 2003. "Is there a natural level of capacity utilization?," Forum for Social Economics, Springer;The Association for Social Economics, vol. 33(1), pages 45-62, September.
    6. 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.

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    Keywords

    Inflation (Finance) ; Unemployment;

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