The Godley–Tobin Memorial Lecture

After illustrating the main macroeconomic features of the NAIRU and some paradoxes arising from its empirical estimates, the paper assesses the literature on hysteresis: how, on the one hand, it casts doubts on the existence of a NAIRU and, on the other hand, how it has been dealt with in mainstream literature as a ‘distortion’ mostly occurring, asymmetrically, after recessions. By contrast, it is argued that the analytical and empirical foundations of the tendency of the economy to return to the NAIRU are analytically unsound and empirically weak: market forces or monetary policy cannot be relied on bringing aggregate demand in line with (potential) aggregate supply. This opens the way to a profoundly different perspective on the working of the economy, whereby aggregate supply adjusts to demand both in the short and in the medium to long run. On these premises, conflicting claims inflation is maintained to be consistent with the evidence of a long-run, non-linear downward sloping Phillips curve both in nominal and real wages. Some features of the analysis presented here had been advanced already by Godley and Tobin in the 1970s.