NAIRU Musings

The Non-Accelerating Inflation Rate of Unemployment (NAIRU) is defined to be "a measure of how low unemployment can go before risking inflationary pressures," or, put another way, "the level of unemployment below which inflation rises." Laurence Ball and Gregory Mankiw of Harvard elegantly explain that this concept "follows naturally from any theory that says that changes in monetary policy, and aggregate demand more generally, push inflation and unemployment in opposite directions in the short run." Intuitively, this inverse relationship makes sense, as demand and spending tend to increase inflation, while simultaneously decreasing unemployment. Conversely, a high-level lack of aggregate demand (and, therefore, lower inflation) triggers higher levels of unemployment. Mankiw continues to say that "once this short-run tradeoff is admitted, there must be some level of unemployment consistent with stable inflation." That is, NAIRU should be deemed synonymous with the "natural" or organic rate of unemployment.

see: (1) NAIRU estimates from the Federal Reserve Bank of Philadelphia (2) great explanation of the relationship between NAIRU, the Phillips Curve, and rational expectations [section 3 of article; graph depicted below] (3) NAIRU and QE3