Working Paper No. 203 | August 1997


A Critical Appraisal

The nonaccelerating inflation rate of unemployment, or NAIRU, has acquired a central role in macroeconomic theory. Fear of inflation has led to a reluctance to allow the unemployment rate to fall below the estimated NAIRU. If so much weight is going to be placed on an estimate of a theoretical variable, it is extremely important to know how valid that theory is and how valid the estimates of that variable are. Visiting Scholar Malcolm Sawyer finds that the mechanism by which an economy would reach a NAIRU has been inadequately specified and that NAIRU models have ignored the role of aggregate demand by implicitly invoking Say's law that supply creates its own demand. He concludes that it is unwise to use the estimated NAIRU as a policy variable unless and until it can be established on stronger theoretical and empirical grounds.

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