Should We Reject the Natural Rate Hypothesis?

37 Pages Posted: 17 Nov 2017

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Date Written: November 15, 2017

Abstract

Fifty 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 tradeoff between the deviation of unemployment from the natural rate and inflation. Both propositions have been challenged. Blanchard reviews the arguments and the macro and micro evidence against each and 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.

Keywords: Unemployment, Hysteresis, Inflation, Phillips Curve, Fluctuations

JEL Classification: E10, E2, E32

Suggested Citation

Blanchard, Olivier J., Should We Reject the Natural Rate Hypothesis? (November 15, 2017). Peterson Institute for International Economics Working Paper No. 17-14. Available at SSRN: https://ssrn.com/abstract=3071974 or http://dx.doi.org/10.2139/ssrn.3071974

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
86
Abstract Views
389
rank
294,163
PlumX Metrics