AUSTRIAN THEORY BISNESS CYCLE, - Economie

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Introduction In a December 1967 Presidential Address to the American Economic Association, Milton Friedman reminded the economics profession of the self-reversing nature of a monetary change by suggesting two limitations of monetary policy. Monetary policy cannot peg either interest rates or the rate of unemployment for more than “very limited periods” (Friedman 1968, 5). The arguments provided by Friedman were developed into the Natural Rate of Unemployment Model (or NAIRU-non-accelerating inflation rate of unemployment model). The development of the theory provided a needed warning to the profession about the efficacy of expansionary macroeconomic policies. The empirical work generated by Friedman’s insights appeared successful. By the late 1980s Charles Freedman (1989, 2), Deputy Governor of The Bank of Canada, could write, “The model ¼ is what I would call the mainstream central bank model of recent years - best characterized as a structural model with an aggregate demand equation, a money demand equation, and an augmented Phillips Curve equation with no tradeoff in the long run ¼ .” However, the combination of low unemployment and low (and decelerating) inflation of the 1990s has caused some economists to question the foundations of this “mainstream central bank model”.1There is an increasing sentiment in the profession that the cautionary emphasis of the natural rate model was never correct, overstated, or has been rendered obsolete by the changed structure of the economy2