Disinflation and the NAIRU
This paper asks why the NAIRU rose in most OECD countries in the 1980s. I find that a central cause was the tight monetary policy used to reduce inflation. The evidence comes from a cross-country comparison: countries with larger decreases in inflation and longer disinflationary periods have larger rises in the NAIRU. Imperfections in the labor market have little direct relation to changes in the NAIRU, but long-term unemployment benefits magnify the effects of disinflation. These results support `hysteresis' theories of unemployment.
|Date of creation:||Mar 1996|
|Date of revision:|
|Publication status:||published as Reducing Inflation: Motivation and Strategy, C. Romer and D. Romer, eds.,(Chicago: University of Chicago Press, 1997)|
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