A little inflation would go a long way to helping reduce unemployment:The natural rate of unemployment versus the natural rate of inflation

Almost a decade ago in 2004 I gave a paper at a conference on Social policy as if people matter organized by progressive economists and policy analysts at Adelphi university. One of the keynote speakers was Joseph Stiglitz. My paper which is available on line (http://www.adelphi.edu/peoplematter/pdfs/Chorney.pdf) made the case that, rather than rigidly adhering to the concept of the natural rate of unemployment – that rate of unemployment below which you would get accelerating inflation, a concept introduced by followers of Milton Friedman – we would be much better off paying attention to what I called the natural rate of inflation, that is: that rate of inflation below which we would experience accelerating unemployment.

I thought the paper was quite innovative and had the potential to change thinking about appropriate monetary and fiscal policy. I am pleased to see that economists at the Federal Reserve and elsewhere are now coming around to this idea. In the New York Times today there is an article reporting on economists advocating a higher rate of inflation as a method of reducing unemployment and warning against the dangers of excessive disinflation and even deflation such as Japan has experienced.(Binyamin Applebaum, In Fed and Out Many Now Think Inflation HelpsNYT , October 27, 2013) Falling prices increases the burden of the debt and discourages firms from hiring workers as well as complicating the process by which savings are brought into with investment. Tolerating a little more inflation while the economy is troubled by excessive unemployment and weaker animal spirits on the part of investors would help reduce the unemployment rate.


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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