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Inflation Targeting and the Natural Rate of Unemployment


  • Willem Thorbecke


Inflation targeting has become an increasingly popular strategy for setting monetary policy during the last decade. While no countries had formal inflation targets before 1990, currently 22 countries use inflation targeting. One notable exception is the United States, where the Federal Reserve has a dual mandate to pursue both price stability and full employment. Some economists advocate inflation targeting for the United States, partly because they fear that otherwise the Fed will try to push unemployment below its "natural rate" - its lowest sustainable level - and trigger accelerating inflation. However, the natural rate theory has proven to be a poor guide for policy making over the last 10 years. Unemployment in 2000 fell 2 percentage points below estimates of the natural rate without spurring inflation. Since inflation targeting derives its justification largely from the theory of the natural rate, it is questionable whether the United States should switch to an inflation-targeting regime. These doubts are reinforced by the manifest success of monetary policy under the dual mandate.

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  • Willem Thorbecke, "undated". "Inflation Targeting and the Natural Rate of Unemployment," Economics Policy Note Archive 04-1, Levy Economics Institute.
  • Handle: RePEc:lev:levypn:04-1

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    References listed on IDEAS

    1. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
    2. Olivier Blanchard & Lawrence F. Katz, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter.
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    Cited by:

    1. Jorg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Economics Working Paper Archive wp_425, Levy Economics Institute.
    2. Joreg Bibow, 2005. "Refocusing the ECB on Output Stabilization and Growth through Inflation Targeting?," Macroeconomics 0507017, EconWPA.

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