Should We Reject the Natural Rate Hypothesis?
AbstractFifty 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 trade-off between the deviation of unemployment from the natural rate and inflation. Both propositions have been challenged. The paper reviews the arguments and the macro and micro evidence against each. It 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.
CitationBlanchard, Olivier. 2018. "Should We Reject the Natural Rate Hypothesis?" Journal of Economic Perspectives, 32 (1): 97-120. DOI: 10.1257/jep.32.1.97
- B22 History of Economic Thought: Macroeconomics
- B31 History of Economic Thought: Individuals
- E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
- E31 Price Level; Inflation; Deflation
- E52 Monetary Policy