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How natural is the natural rate?


  • K. Alec Chrystal
  • Monojit Chatterji


In the last two decades the one macroeconomic concept which has become standard equipment in macroeconomics is the Natural Rate Hypothesis (NRH). The NRH is usually embodied as a vertical aggregate supply curve and forms a cornerstone of the "policy ineffectiveness" proposition. We emphasize that the driving power of the policy ineffectiveness proposition derives from the joint assumptions that (a) the aggregate supply curve is vertical and (b) that the aggregate supply curve is independent of aggregate demand. ; We claim that this usage of the NRH is inappropriate for many purposes. It results from a trivialization of the supply structure of the economy and has little justification if it is intended to analyze the real effects of virtually any imaginable policy. We give some examples where minor modifications to the supply structure generate an aggregate supply curve which is not independent of aggregate demand. With fully informed optimizing agents each policy action will generate a new general equilibrium. Nothing is "natural" and little is policy invariant. Evidence is presented to show that the issues raised may be of empirical significance.

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  • K. Alec Chrystal & Monojit Chatterji, 1984. "How natural is the natural rate?," Working Papers 1984-010, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:1984-010

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    References listed on IDEAS

    1. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
    2. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-115, March.
    3. Herschel I. Grossman, 1980. "Rational Expectations, Business Cycles, and Government Behavior," NBER Chapters,in: Rational Expectations and Economic Policy, pages 5-22 National Bureau of Economic Research, Inc.
    4. Buiter, Willem H, 1980. "The Macroeconomics of Dr. Pangloss: A Critical Survey of the New Classical Macroeconomics," Economic Journal, Royal Economic Society, vol. 90(357), pages 34-50, March.
    5. Evans, Paul, 1984. "The Effects on Output of Money Growth and Interest Rate Volatility in the United States," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 204-222, April.
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