Should We Get Rid of the Natural Rate Hypothesis?

38 Pages Posted: 28 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 2017

Abstract

50 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 trade-off between the deviation of unemployment from the natural rate and inflation. Both propositions have been challenged. The paper reviews the arguments and the macro and micro evidence against each. It concludes that, in each case, the evidence is suggestive, but not conclusive. Policy makers should keep the natural rate hypothesis as their null hypothesis, but keep an open mind and put some weight on the alternatives.

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Suggested Citation

Blanchard, Olivier J., Should We Get Rid of the Natural Rate Hypothesis? (November 2017). NBER Working Paper No. w24057. Available at SSRN: https://ssrn.com/abstract=3077785

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

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