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Money, Finance and Capitalist Development

Edited by Philip Arestis and Malcolm Sawyer

In the past thirty years the financial sector has seen unparalleled growth and has exerted increased economic and political influence and significance. This growth has come hand-in-hand with several serious economic crises and greater monetary instability. Set against this background, this important book offers a wide ranging, critical analysis of the financial sector.
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Chapter 7: The NAIRU: a critical appraisal

Malcolm Sawyer


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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