Disinflation and the NAIRU

Laurence Ball

NBER Working Paper No. 5520
Issued in March 1996
NBER Program(s):   EFG   ME

This paper asks why the NAIRU rose in most OECD countries in the 1980s. I find that a central cause was the tight monetary policy used to reduce inflation. The evidence comes from a cross-country comparison: countries with larger decreases in inflation and longer disinflationary periods have larger rises in the NAIRU. Imperfections in the labor market have little direct relation to changes in the NAIRU, but long-term unemployment benefits magnify the effects of disinflation. These results support `hysteresis' theories of unemployment.

(1330 K)

Published:

• Reducing Inflation: Motivation and Strategy, C. Romer and D. Romer, eds.,(Chicago: University of Chicago Press, 1997) ,
• Disinflation and the NAIRU, Laurence M. Ball, in Reducing Inflation: Motivation and Strategy (1997), University of Chicago Press
  

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