Chapter 7: The NAIRU: a critical appraisal
Malcolm Sawyer1 7.1. THE POLICY IMPORTANCE OF THE NAIRU There can be little doubting the central role which has been played in macroeconomic theory and policy, ﬁrst by the natural rate of unemployment (hereafter NRU) and more latterly the non-accelerating inﬂation rate of unemployment (hereafter NAIRU).2 These concepts have conveyed the message that the level of unemployment is eﬀectively determined on the supply side of the economy (and usually seen as the labour market). Its inﬂuence on policy has arisen from its apparent message that demand reﬂation can have, at best, short-lived beneﬁcial eﬀects on employment with longer-term inﬂationary consequences, and that supply-side measures may have some eﬀect on the unemployment whereas demand side measures may have some short-term eﬀects but not any long-term or long-lasting eﬀects. The fear of inﬂation, especially of rising inﬂation moving into hyperinﬂation, has then led to a reluctance (to put it mildly) to allow the level of unemployment to fall below the NAIRU. The central thrust of this chapter is a critical analysis of the economic theories associated with the concept of the NAIRU (which is shortly discussed in some detail). In doing so. we are particularly concerned with the impact which the concept of the NAIRU has had on policy formulation. The transfer from the theoretical to the policy level leads to the following consideration. The estimates for the NAIRU are based on the econometric estimation of models of...
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