NAIRU — a false hypothesis2 December, 2016 at 20:32 | Posted in Economics | 3 Comments
The natural rate hypothesis (NRH) is the idea that unemployment has an inherent tendency to return to some special “natural rate” that is a property of the available technology for finding jobs. It is a fact of nature, a bit like the gravitational constant in celestial mechanics. The theory of the NRH natural rate hypothesis has been taught to every economist in every top economics department for the past thirty years. As part of the package, economists learn that the natural rate cannot be influenced by fiscal or monetary policy …
Even today, the NRH is a central component of New Keynesian economics and, with very few exceptions, central bankers, politicians, and economic talking heads use the theory of the natural rate of unemployment to explain their views on the appropriate stance of monetary policy. I believe that the NRH is false, and this fact has important consequences. If central bankers are working with a false theory, they are likely to make bad decisions that affect all of our lives.
Farmer has always — as did e. g. Wicksell and Keynes — made a point of the fact that equilibrium and optimality are not the same thing. That also implies that the economy being in equilibrium does not have to be inconsistent with high and persistent unemployment rates. Farmer uses a search theoretical approach to underpin this view. Although yours truly do not share his faiblesse for the Mortensen-Pissarides-Diamond modeling of Keynesian ideas re labour markets and unemployment, it is interesting to take part of his argumentation for his view in his book.