A Kaleckian Alternative to the New Consensus on Monetary Policy and Wage Bargaining: Trying to Make Sense of the NAIRU

Abstract

The idea of a NAIRU is at the core of modern New Keynesian and New Consensus models of monetary policy analysis.2 In these models the NAIRU is determined by structural factors of the labour market, the wage bargaining process, and the social benefit system. Due to ‘micro-founded’ rigidities, short-run unemployment determined by the goods market may deviate from long-run equilibrium unemployment given by the NAIRU. However, New Keynesian and New Consensus models suppose a perhaps slow, but stable adjustment mechanism of the actual unemployment rate to the NAIRU, either through a real balance effect or through a monetary policy reaction function. A downward-sloping Phillips curve is valid in the short run, but in the long run effective demand and hence monetary policies have no effect on the NAIRU, and the long-run Phillips curve becomes vertical again. All that monetary policy can do is stabilize output and employment in the short run and stabilize inflation in the long run (Fontana/Palacio-Vera 2005).