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Tuesday, November 19, 2013

Links: NAIRU and The Money Multiplier

Chart: No Visible Impact Of NAIRU
 In "Why we have to learn about NAIRU (and reject it)", Bill Mitchell discusses the theoretical problems with NAIRU. NAIRU is the Non-Accelerating Inflation Rate of Unemployment, which replaced the "natural rate of unemployment", which was empirically rejected. Professor Mitchell actually posts a video that demonstrates how the estimated NAIRU is just a smoothed version of unemployment. In other words, it is almost the same thing as taking an exponential moving average of the unemployment rate (as known as "adaptive expectations"). (Bodies that calculate the NAIRU, like the OECD, probably use a more complicated filter, but the result ends up being roughly the same.)

As my chart above shows, there does not appear to be a level for the unemployment rate for which:
  •  if the unemployment rate is above that level, inflation falls; and
  • if the unemployment rate is below that level, inflation rises.

Also, in "On the (ir)relevance of the money multiplier model: The Fed view", "circuit" of the Fictional Reserve Barking blog gives a good literature survey of the money multiplier. In summary: the Fed has not believed in the money multiplier for a long time, and it is a mystery why textbooks still refer to it.

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