Summary
Traditionally, macroeconomics had been the realm of the Keynesians, whereas classical precepts had traditionally been applied to microeconomics and aggregated to have a shot at macro. NCM takes and applies this basis to develop a clear and coherent set of principles that aim to explain the major players, unemployment and inflation, from a fully neoclassical perspective.Main definitions and economists:
Unemployment and inflation:
- NCM’s Phillips curve
- Natural rate of unemployment
- Business cycles
- Cahuc’s adjustment cost
The term natural rate of unemployment was introduced by Milton Friedman in 1968, in his article “The Role of Monetary Policy”, following his presidential address delivered at the annual meeting of the American Economic Association, in 1967. It is based in Knut Wicksell’ concept of “natural” rate, which defines how there will be no permanent changes in the considered variable below or above its natural level.
The natural rate of unemployment defines the level at which unemployment will remain, no matter how great the effects of monetary policy. The only way to permanently keep unemployment under its natural rate is to resort to higher and higher inflation rates, which in turn would be highly hazardous for the economy. This can be easily understood using an expectations-augmented Phillips curve.
Even though the natural rate of unemployment is usually merged in the economic literature with the term NAIRU, there are a few differences between both terms. These differences are summarized in the following grid:
| Natural rate of unemployment (NRU) | NAIRU | |
| Theoretical starting point | ||
| Origins of deviation |
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| Inflationist mechanism |
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| Type of unemployment |
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| Uniqueness of equilibrium |
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