The NAIRU should have been buried decades ago
(http://bilbo.economicoutlook.net/blog/?p=48837)
(i) Ohar batzuk
In 1983, I started a PhD at the University of Manchester working within the Phillips curve framework.
My work was an attempt to show this shift in thinking – away from a commitment to full employment was based on a lie.
Some 40 years later, the ECB has produced a research paper which now supports the position I took back then. Millions of jobless people later!
The traditional Phillips curve was based on the notion that there was a trade-off between inflation and unemployment, such that when unemployment was low, wage pressures would push up costs and firms, exercising price-setting power through mark-ups, would pass the rising costs on as price rises.
To reduce inflationary pressures, unemployment had to rise.
So governments had to choose between the ‘twin evils’ and a lot of work was done in government departments trying to work out the socially optimal trade-off.
Then the Monetarists came along and claimed that there was no trade-off really because inflationary expectations drove inflation quite apart from whether unemployment was low or high.
(ii) 2021eko abendua: EBZ-ren papera
In the last week (December , 2021), the ECB has put out Working Paper 2625 – Hysteresis in unemployment: evidence from OECD estimates of the natural rate (it was actually published as an NBER working paper in October 2021).
The ECB paper now find that:
1. Aggregate demand shocks (rises and falls in spending) have “permanent effects” – so when the economy goes into a slump and the unemployment rate rises, so does the estimate of the natural rate.
2. These hysteresis effects are symmetric – which is what I found in 1987.
In other words, expansionary fiscal policy drives the unemployment rate down and pushes any inflation constraint arising from structural impediments out.
3. The paper “finds strong evidence of hysteresis …”
Which means the mainstream are finally catching up.
These findings reject core New Keynesian propositions.
They should be abandoned.
But then the whole house of cards would fall.
We are waiting for that.
Ondorioa
So when you hear an economist rave on about the NAIRU and the need for fiscal constraint – disregard them.
