Olivier Blanchard has referred to a “natural rate of unemployment,” a “structural rate of unemployment,” a “natural level of output,” and a “level of potential output.”

Olivier Blanchard has referred to a “natural rate of unemployment,” a “structural rate of unemployment,” a “natural level of output,” and a “level of potential output.”
usage of a term like this is found in what he calls “the non-accelerating inflation rate of unemployment.” How does he calculate a formula for this “NAIRU”? In Blanchard’s IS-LM-PC model, if the actual rate of unemployment differs from the NAIRU, there is no “natural” tendency for the economy to return to a level of output consistent with the NAIRU. Explain why. In this model, however, monetary policy can return us to the NAIRU and to any unchanging level of inflation we want. How?

Blanchard establishes a wage-setting equation, w=p^e F(u,z) and a price-setting equation, p=(1+m)w. This gives us p=p^e (1+m)F(u,z), which he then writes as p=p^e (1+m)(1-au+z). Converting this from price levels to inflation rates. he gets p=p^e+(m+z)-au. If p^e=p_(t-1),p_t-p_(t-1)=(m+z)-au_t. If p=p^e, 0=(m+z)-au_n, so u_n=(m+z)/a.

If u_t<u_n, we have accelerating inflation, and as long as the condition prevails, p_t-p_(t-1)=-a(u_t-u_n ). The only thing that can eliminate the accelerating inflation is u_t=u_n.

If the central bank raises its real policy rate, moving the LM curve so that it intersects with IS at Yn, then inflation will no longer be accelerating. If the central bank wants to change the rate of inflation to zero or whatever, it can do this by raising the LM curve to an intersection with IS at a lower level of Y for a time until inflation falls to where it wants. Then they can move LM back to intersect with IS at Yn.

2. In the Phillips Curve (equation [2]) in Laurence Meyer’s “Monetarism Without Money” model, the actual rate of inflation is governed by the output gap, past inflation, and expected future inflation. How does the inclusion of past inflation capture the role of sticky wages and prices in the short run? Here he must really be talking about sticky rates of growth of wages and prices. Still, we ought to be able to apply the New Keynesian explanations of sticky wages and prices to this. What are the New Keynesian explanations of sticky wages and prices? Why did John Maynard Keynes say that sticky wages and prices are not necessary to have involuntary unemployment?

In Meyer’s model, if the present inflation rate is influenced by the past inflation rate, it will be somewhat sticky. If the same considerations which cause wages and prices to be sticky cause the inflation rate to be sticky, we will not have the amount of wage and price flexibility that will return us to full employment.

The New Keynesians explain sticky wages and prices by positing customer and worker attachment concerns, implicit and explicit contracts. mark-up pricing, and efficiency wages. There are also what Peterson calls interdependencies and macroeconomic externalities.

Keynes says that lower money wages, if output prices don’t change, mean lower real wages, which means less demand for output and so employment. If output prices fall also, as long as they don’t fall so much that profits per unit become lower than before money wages started to fall, real wages will be less than or equal to what they were before, which means at best unchanged demand for output and employment. The only things that could increase employment would be higher real wages or some other development to increase demand for output.