Working Paper: NBER ID: w24057
Authors: Olivier J. Blanchard
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.
Keywords: Natural Rate Hypothesis; Monetary Policy; Unemployment; Inflation
JEL Codes: E30; E31; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| natural rate of unemployment is independent of monetary policy (E19) | inflation (E31) |
| monetary policy cannot sustain unemployment below natural rate without leading to inflation (E64) | inflation (E31) |
| no long-run tradeoff between unemployment and inflation (E31) | decreasing inflation rates (E31) |
| high unemployment does not lead to decreasing inflation rates (J64) | decreasing inflation rates (E31) |
| persistent effects of monetary policy (E49) | unemployment (J64) |