The NRH is Wrong

Here is an excerpt from Chapter 3, pages 32-33, of Prosperity for All. (Link to Amazon US, Link to Amazon UK, Amazon Kindle).

"The natural rate hypothesis (NRH) is the idea that unemployment has an inherent tendency to return to some special “natural rate” that is a property of the available technology for finding jobs. It is a fact of nature, a bit like the gravitational constant in celestial mechanics. The theory of the NRH natural rate hypothesis has been taught to every economist in every top economics department for the past thirty years. As part of the package, economists learn that the natural rate cannot be influenced by fiscal or monetary policy."

"Even today, the NRH is a central component of New Keynesian economics and, with very few exceptions, central bankers, politicians, and economic talking heads use the theory of the natural rate of unemployment to explain their views on the appropriate stance of monetary policy. I believe that the NRH  is false, and this fact has important consequences. If central bankers are working with a false theory, they are likely to make bad decisions that affect all of our lives."

(c) Oxford University Press