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Natural Rate Doubts

  • Farmer, Roger E A

This paper provides evidence for a low frequency relationship between unemployment, inflation and the nominal interest rate. I show that in the United States from 1959.1 to 1991.3, the unemployment rate, the inflation rate and the federal funds rate can be modelled as non stationary time series linked by two co-integrating equations. One of these equations is stable over the whole sample period, the other is different over the sub periods 1959.1-1979.4 and 1980.1-1999.3. I evaluate the ability of a class of models to explain these facts and conclude that models that incorporate the natural rate hypothesis are inadequate. An alternative class of models, characterized by the existence of an upward sloping long-run Phillips curve, can account for the data.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2426.

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Date of creation: Apr 2000
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Handle: RePEc:cpr:ceprdp:2426
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  1. Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
  2. Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
  3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  4. Rudebusch, G.D., 1996. "Do Measures of Monetary Policy in a VAR Make Sense?," Papers 269, Banca Italia - Servizio di Studi.
  5. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1987. "Stochastic Trends and Economic Fluctuations," NBER Working Papers 2229, National Bureau of Economic Research, Inc.
  6. Peter N. Ireland, 1998. "Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?," Boston College Working Papers in Economics 415, Boston College Department of Economics.
  7. Wouter J. den Haan & Garey Ramey & Joel Watson, 1999. "Contract-Theoretic Approaches to Wages and Displacement," NBER Working Papers 6972, National Bureau of Economic Research, Inc.
  8. James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
  9. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  10. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, September.
  11. Orphanides, Athanasios, 1999. "The Quest for Prosperity Without Inflation," Working Paper Series 93, Sveriges Riksbank (Central Bank of Sweden).
  12. 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.
  13. Thomas Laubach and John C. Williams, 2001. "Measuring the Natural Rate of Interest," Computing in Economics and Finance 2001 35, Society for Computational Economics.
  14. Orphanides, Athanasios & Williams, John C., 2004. "The decline of activist stabilization policy: Natural rate misperceptions, learning, and expectations," CFS Working Paper Series 2004/24, Center for Financial Studies (CFS).
  15. Robert G. King & Mark W. Watson, 1992. "Testing long run neutrality," Working Paper Series, Macroeconomic Issues 92-18, Federal Reserve Bank of Chicago.
  16. Fisher, Mark E & Seater, John J, 1993. "Long-Run Neutrality and Superneutrality in an ARIMA Framework," American Economic Review, American Economic Association, vol. 83(3), pages 402-15, June.
  17. Benhabib, J. & Farmer, R.E.A., 1999. "The Monetary Transmission Mechanism," Economics Working Papers eco99/35, European University Institute.
  18. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  19. Gordon, Robert J, 1996. "The Time-varying NAIRU and its Implications for Economic Policy," CEPR Discussion Papers 1492, C.E.P.R. Discussion Papers.
  20. Laurence Ball, 1996. "Disinflation and the NAIRU," NBER Working Papers 5520, National Bureau of Economic Research, Inc.
  21. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  22. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
  23. Katarina Juselius, 2001. "European integration and monetary transmission mechanisms: the case of Italy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 341-358.
  24. Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers 496, UCLA Department of Economics.
  25. Søren Johansen & Katarina Juselius, 1992. "Identification of the Long-Run and the Short-Run Structure: An Application to the ISLM Model," Discussion Papers 92-04, University of Copenhagen. Department of Economics.
  26. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  27. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  28. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
  29. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-48, November.
  30. Jushan Bai & Robin L. Lumsdaine & James H. Stock, 1998. "Testing For and Dating Common Breaks in Multivariate Time Series," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 395-432.
  31. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  32. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
  33. repec:fth:starer:9613 is not listed on IDEAS
  34. Grant, Alan P., 2002. "Time-varying estimates of the natural rate of unemployment: a revisitation of Okun's law," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(1), pages 95-113.
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