The Fed’s odd ideas on NAIRU.

I’ve just suggested to the Fed that they make some changes to one of their charts. Reasons are thus.

As a result of a discussion in the comments after this article about NAIRU on Mike Norman’s site, I came across this Fed chart which purports to show how NAIRU has changed over time. Strikes me the chart is misleading because it implies NAIRU can be estimated with the same accuracy as some other items that appear on Fed charts, like inflation, the money supply, numbers unemployed and so on.

So I suggested they put a “health warning” on the chart that basically makes the latter point, i.e. that the chart simply shows the Fed’s best guess as to what NAIRU is, and that the guess could easily be about 20 to 40% out.

Also, the Fed’s definition of NAIRU is very odd (see left hand side just under the chart). It goes thus. “The natural rate of unemployment (NAIRU) is the rate of unemployment arising from all sources except fluctuations in aggregate demand.”

That is a hundred miles from conventional definitions.