ABSTRACT
In recent years, a debate has re-emerged about whether the Federal Reserve should pay attention to the “non-accelerating-inflation rate of unemployment" (NAIRU) in conducting monetary policy. NAIRU is an acronym for “non-accelerating-inflation rate of unemployment”. The NAIRU figures prominently in the Phillips curve, which is a relationship that incorporates a temporary trade-off between the unemployment rate and inflation. According to the Phillips curve, an unemployment rate that is below the level identified as the NAIRU tends to be associated with an increase in inflation; conversely, an unemployment rate that is above the NAIRU tends to be associated with a decrease in inflation. According to models of the economy that incorporate a Phillips curve, the unemployment rate plays a role in the transmission process from unanticipated changes in the aggregate demand for goods and services to inflation. Models that can forecast inflation are valuable to central bankers because monetary policy actions affect inflation with a lag.
