The Natural Rate Of Inflation Isn't Carved In Stone

In the debate about the Fed's recent rate hikes, we have heard a great deal about the "natural rate of unemployment." The concept, coined by economist Milton Friedman in 1968, is that there is a normal amount of unemployment; if the government tries through fiscal or monetary policy to reduce joblessness below its "natural" or equilibrium rate, the economy will just pay a price in inflation. That in turn will reduce investment and thus create higher unemployment later on. This claim is a variant on the usual mantra of Chicago-school economics: The economy is doing the best it can, so leave well enough alone.

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