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Is low unemployment inflationary?

Listed author(s):
  • Roberto Chang

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.

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

Volume (Year): (1997)
Issue (Month): Q I ()
Pages: 4-13

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Handle: RePEc:fip:fedaer:y:1997:i:qi:p:4-13:n:v.86no.1
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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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