Should We Reject the Natural Rate Hypothesis?
37 Pages Posted: 17 Nov 2017
Date Written: November 15, 2017
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: Suggested Citation