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Should We Reject the Natural Rate Hypothesis?

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  • Olivier J Blanchard

    () (Peterson Institute for International Economics)

Abstract

Fifty years ago, Milton Friedman articulated the natural rate hypothesis. It was composed of two sub-hypotheses: First, the natural rate of unemployment is independent of monetary policy. Second, there is no long-run tradeoff between the deviation of unemployment from the natural rate and inflation. Both propositions have been challenged. Blanchard reviews the arguments and the macro and micro evidence against each and concludes that, in each case, the evidence is suggestive but not conclusive. Policymakers should keep the natural rate hypothesis as their null hypothesis but keep an open mind and put some weight on the alternatives.

Suggested Citation

  • Olivier J Blanchard, 2017. "Should We Reject the Natural Rate Hypothesis?," Working Paper Series WP17-14, Peterson Institute for International Economics.
  • Handle: RePEc:iie:wpaper:wp17-14
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    Cited by:

    1. Jesus Ferreiro & Carmen Gómez, 2018. "Employment protection and labour market performance in European Union countries during the Great Recession," FMM Working Paper 31-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    2. Lídia Farré & Francesco Fasani & Hannes Mueller, 2018. "Feeling useless: the effect of unemployment on mental health in the Great Recession," IZA Journal of Labor Economics, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 7(1), pages 1-34, December.
    3. Luís Aguiar-Conraria & Manuel M. F. Martins & Maria Joana Soares, 2019. "The Phillips Curve at 60: time for time and frequency," NIPE Working Papers 04/2019, NIPE - Universidade do Minho.
    4. Muriel Dal-Pont Legrand & Harald Hagemann, 2019. "Impulses and Propagation Mechanisms in Equilibrium Business Cycles Theories: From Interwar Debates to DSGE "Consensus"," GREDEG Working Papers 2019-01, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    5. Jean-Luc Gaffard & Mauro Napoletano, 2018. "Market disequilibrium, monetary policy, and financial markets: insights from new tools," LEM Papers Series 2018/17, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    6. Gilles Dufrénot & Meryem Rhouzlane & Etienne Vaccaro-Grange, 2019. "Potential Growth and Natural Yield Curve in Japan," Working Papers halshs-02091035, HAL.
    7. repec:nzb:nzbbul:apr2019:3 is not listed on IDEAS
    8. Thomas Palley, 2018. "Recovering Keynesian Phillips curve theory," FMM Working Paper 26-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    9. Jean-Luc Gaffard & Mauro Napoletano, 2018. "Hétérogénéité des agents, interconnexions financières et politique monétaire : une approche non conventionnelle," Revue française d'économie, Presses de Sciences-Po, vol. 0(3), pages 201-231.
    10. repec:onb:oenbmp:y:2018:i:q2/18:b:1 is not listed on IDEAS
    11. Robert Calvert Jump & Engelbert Stockhammer, 2019. "Reconsidering the natural rate hypothesis," FMM Working Paper 45-2019, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    12. repec:eee:jmacro:v:60:y:2019:i:c:p:79-96 is not listed on IDEAS
    13. Di Bella, Gabriel & Grigoli, Francesco, 2019. "Optimism, pessimism, and short-term fluctuations," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 79-96.
    14. Galstyan, Vahagn, 2019. "Inflation and the Current Account in the Euro Area," Economic Letters 4/EL/19, Central Bank of Ireland.
    15. Punnoose Jacob & Martin Wong, 2018. "Estimating the NAIRU and the Natural Rate of Unemployment for New Zealand," Reserve Bank of New Zealand Analytical Notes series AN2018/04, Reserve Bank of New Zealand.
    16. Kristin Forbes, 2019. "Has globalization changed the inflation process?," BIS Working Papers 791, Bank for International Settlements.
    17. Tommaso Proietti, 2019. "Predictability, Real Time Estimation, and the Formulation of Unobserved Components Models," CEIS Research Paper 455, Tor Vergata University, CEIS, revised 22 Mar 2019.
    18. Benoit Mojon & Xavier Ragot, 2019. "Can an ageing workforce explain low inflation?," BIS Working Papers 776, Bank for International Settlements.
    19. Olivier J. Blanchard & Lawrence H. Summers, 2017. "Rethinking Stabilization Policy: Evolution or Revolution?," NBER Working Papers 24179, National Bureau of Economic Research, Inc.
    20. Bullard, James B., 2018. "Allan Meltzer and the Search for a Nominal Anchor: a speech at the "Meltzer's Contributions to Monetary Economics and Public Policy, Philadelphia, Pa," Speech 296, Federal Reserve Bank of St. Louis.
    21. Jesus Ferreiro & Carmen Gómez, 2019. "Employment Protection, Employment and Unemployment Rates in European Union Countries During the Great Recession," Working Papers 0037, ASTRIL - Associazione Studi e Ricerche Interdisciplinari sul Lavoro.
    22. repec:fip:fedlrv:00099 is not listed on IDEAS
    23. repec:rba:rbaacv:acv2018-10 is not listed on IDEAS

    More about this item

    Keywords

    Unemployment; Hysteresis; Inflation; Phillips Curve; Fluctuations;

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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