The natural rate of unemployment reconsidered
This paper by Robert E. Hall and Marianna Kudlyak examines the role of the natural rate of unemployment in the business cycle and its relationship to the Phillips curve. The authors propose an “anchored-inflation method” to identify the natural rate during periods when inflation is stable at its target level and then they compare it to other existing methods for estimating the natural rate, including unemployment-trend, statistical submodel, and macro-model approaches. They examine how misspecification of the natural rate can bias estimates of the Phillips curve slope focusing on the recovery period of 2009-2019 as a key case study.
Key findings:
- The natural rate of unemployment may play a more active role in the business cycle than commonly assumed, potentially tracking actual unemployment closely during recoveries.
- During the 2009-2019 recovery, the natural rate likely declined along with actual unemployment while inflation remained stable near the Fed’s 2% target.
- Failing to account for movements in the natural rate can lead to underestimation of the Phillips curve slope, potentially explaining findings of a “flat” Phillips curve in recent years.
- During recoveries, unemployment by itself may not be the proper measure of inflation pressure – the gap between actual and natural unemployment is more relevant.
- The pandemic may have steepened the Phillips curve by increasing price flexibility in response to heightened economic volatility.
The authors conclude that the natural rate of unemployment deserves more attention in macroeconomic analysis and may be more closely tied to actual unemployment during recoveries than previously thought.
The Active Role of the Natural Rate of Unemployment
Authors: Robert E. Hall, Marianna Kudlyak
From: Stanford University, Federal Reserve Bank of San Francisco
Has the Fed moved beyond NAIRU in Monetary Policy?
J. W. Mason, in this article, discusses the evolving perspective of the Federal Reserve on monetary policy, particularly focusing on the concept of NAIRU (Non-Accelerating Inflation Rate of Unemployment) and its relevance in current economic thinking. Here’s a summary of his key arguments:
- Shift in Fed’s thinking: J.W. Mason argues that there has been a noticeable shift in the Fed’s approach to monetary policy, moving away from the traditional NAIRU framework, especially after the 2007-2009 financial crisis.
- NAIRU framework: Traditionally, the Fed believed in a unique level of unemployment consistent with stable inflation, NAIRU. This framework implied that full employment and price stability were essentially the same goal.
- Post-crisis changes: After the financial crisis, alternative perspectives on monetary policy and inflation gained traction. The Fed, under Jerome Powell’s leadership, became more open to a broader vision of its goals and methods.
- Empirical evidence: A study by European political scientists analyzed 120 speeches by FOMC members from 2012 to 2022, showing a decrease in references to NAIRU and an increase in expressions of uncertainty about natural rates and concerns about hysteresis.
- Personnel changes: The shift in Fed thinking was largely due to changes in FOMC composition rather than individual members changing their views. Powell and Brainard are noted as being particularly skeptical of the NAIRU framework.
- Recent developments: Post-2022 inflation surge, there’s been some return to traditional language, but the Fed still seems to be moving away from relying solely on the unemployment rate as a measure of economic slack.
- Future outlook: The article questions whether the Fed will return to its old worldview or maintain a more agnostic, data-driven approach that allows for stronger labor markets without assuming inflationary consequences.
Does the Fed Still Believe in the NAIRU?
By: J. W. Mason – City University of New York
