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.