A Post-Keynesian Approach
- New Directions in Modern Economics series
Edited by Claude Gnos, Louis-Philippe Rochon and Domenica Tropeano
Chapter 5: Faith-based Macroeconomics: A Critique of Recent Developments in NAIRU Estimation
5. Faith-based macroeconomics: a critique of recent developments in NAIRU estimation Dany Lang and Mark Setterfield 1. INTRODUCTION The idea of a non-accelerating inflation rate of unemployment (NAIRU) is a well-established but controversial feature of modern macroeconomics. The NAIRU codifies a pre-Keynesian vision of the economy, according to which money is neutral and aggregate demand is irrelevant for the determination of output and employment, at least in the long run. Although critics of the NAIRU question its very existence (see, e.g., Galbraith 1997; Lang 2007), the concept has made deep inroads into macroeconomic policy circles, and there exists an extensive empirical literature that purports to identify the precise value of the NAIRU that policy makers should incorporate into their decisions. Our concern in this chapter is with recent developments in the literature that seeks to estimate the value of the NAIRU. A necessary condition for the existence of a NAIRU is dynamic homogeneity: the ‘Phillips curve’ should be homogeneous of degree one in lagged and/or expected inflation. But contemporary approaches to estimating the NAIRU typically assume rather than test for dynamic homogeneity, thus assuming (rather than testing for) the existence of a NAIRU. We argue that these developments remove the NAIRU from the domain of testable hypotheses and transform the concept into an article of faith. In terms of the Popper–Lakatos tradition in the methodology of science, this makes the contemporary empirical NAIRU literature a degenerative research programme. The remainder of our chapter is organized as follows. Sections 2...
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