The Natural Rate Hypothesis has been around us for … since Freidman presidential adress (1968?). Economists know that the definition lies on shaky grounds: the general “equilibrium” referred to in the definition has never existed or proven to exist.
But assuming it does exist, we should add a concept acounting for the huge gap between the actual and naural rates. Call it the supernatural Gap!
Supernatural Rate = Actual Rate – Natural rate
Who would say that this is not the case!
New data on the Superrnatural rate are coming out pretty soon. Indeed every first friday of the month unless something important happens.
“Economic output in the US seems to have recovered since the Great Recession – but jobs have not” write Guillermo Calvo, Fabrizio Coricelli, Pablo Ottonello in US unemployment: Neither natural nor unnatural on vox.
This ‘jobless recovery’ has led economists to argue that unemployment has reached a point where it can fall no further without further inflation. This column disagrees, suggesting the nature of the crisis affects the nature of the recovery.
The Great Recession in the US has been followed by high and persistent unemployment. Although output recovered its pre-crisis level, the unemployment rate is still above its pre-crisis level, a situation that is popularly called ‘jobless recovery’.
Financial crises carry the seeds of jobless recoveries
As we (the authors: Guillermo Calvo, Fabrizio Coricelli, Pablo Ottonello) argue, following the disruption in credit markets typical of financial crises, collateral requirements drastically change and loans are biased towards projects and firms possessing easily recognisable collateral, associated with tangible assets, which can be defined as ‘intrinsic collateral’ (see Calvo 2011). Projects involving the creation of new jobs are generally cut off from financing, as they possess little ‘intrinsic’ collateral, and thus the recovery of output tends to be jobless.
However, this extra joblessness is not present in ‘high-inflation’ emerging market episodes. In those episodes, real wages bear the brunt of the adjustment and, even more remarkably, unemployment goes back to its pre-crisis level.1
This evidence could be construed to imply that inflation helps to accelerate the return to full employment. It should be noted, however, that in the average high-inflation emerging-market episode covered by our sample, inflation spiked up at the beginning of those episodes but later subsided, and did not result in permanently higher inflation. In other words, the empirical evidence does not bluntly contradict the existence of a long-run vertical Phillips curve around the pre-crisis rate of unemployment. But, it also suggests that a sharp dosage of price inflation for a limited period of time may go a long way to restoring full employment after financial crises, albeit at the cost of lower real wages.
We hasten to say, though, that these observations do not lead us to urge Mr Bernanke to take the high-inflation road..