News Release
British Unemployment and Monetary Policy
02 December 1999
Dr Sushil Wadhwani, a member of the Monetary Policy Committee of the Bank of England, today discusses evidence suggesting that the traditional relationship between inflation and unemployment has broken down during the 1990s. Speaking to the Society of Business Economists, he argues that the equilibrium rate of unemployment has fallen significantly since the 1980s.
Evidence for a recent fall in the so-called non-accelerating inflation rate of unemployment (NAIRU) can be found in both econometric equations and in the fact that the average economic forecaster has systematically over-predicted inflation and unemployment since 1992.
Dr Wadhwani points to structural changes in the labour market and the intensification of product market competition as reasons for the fall in the NAIRU. However, an examination of the same factors suggests that the NAIRU today is still higher than in the 1960s.
Looking ahead, he goes on to conjecture that the NAIRU will probably continue to fall over the next few years, though the extent to which this occurrs depends on how quickly the internet has an impact on margins and costs, and also on how comprehensive the New Deal becomes.
In discussing the current conjuncture, Sushil Wadhwani reminds his audience that " ….. a belief that the NAIRU has fallen and is likely to fall further does not, of course, necessarily imply that one might be complacent about
inflation …. . The MPC shall, of course, have to continue to look at a wide variety of indicators in order to assess inflation prospects."
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