Friedman denied the existence of a permanent long run trade off between

Friedman denied the existence of a permanent long run

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unemployment, and put forward the ‘natural rate of unemployment’ hypothesis. 4. Five main implications for the role and conduct of stabilization policy derive from the view that the long-run Phillips curve is vertical at the natural rate of unemployment. First, the authorities can reduce unemployment below the natural rate only in the short run and then only because inflation is not fully anticipated. The assumption underlying orthodox monetarist analysis isthat expected inflation adjusts to actual inflation only gradually in line with the so-called ‘adaptive’ expectations hypothesis. Second, any attempt to maintain unemployment permanently below the natural rate will result in accelerating inflation. Third, if governments wish to reduce the natural rate of unemployment in order to achieve higher output and employment levels they should pursue supply-management policies which are designed to improve the structure and functioning of the labour market and industry rather than demand-management policies. Fourth, the natural rate is compatible with any rate of inflation which in turn is determined by the rate ofmonetary expansion in line with the quantity theory tradition.Given the belief that inflation is essentially a monetary phenomenon (see Friedman 1970) propagated byexcessive monetary growth monetarists argue that inflation can be reduced only by slowing down the rate of growth of the 10 The development of modern macroeconomics money supply. In monetarist analysis the output/employment cost of disinflation depends on three main factors namely: (1) whether the authorities follow a path of rapid or gradual monetary contraction (cold turkey v. gradualism); (2) the
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