September 17, 2020

222. The mythical world of NAIRU

The US Federal reserve this week indicated that interest rates will remain close to zero through till 2023, at the earliest. Why because inflation is subdued and they don’t expect it to pick up until employment returns to normal. But what’s normal? Central banks work on the principle of NAIRU - the nonaccelerating inflation rate of unemployment – but they never seem to be able top in down exactly what that rate is. Before the pandemic US unemployment was down to 3.5 percent, with no sign of inflation lifting. Phil Dobbie asks Prof Steve Keen whether the idea of a fixed NAIRU rate just plain wrong?

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