The Natural Rate of Inflation in the United States

D.J. Smyth and Pami Dua

Economic Analysis and Policy, 1988, vol. 18, issue 2, 191-198

Abstract: In this paper we estimate the natural rate of inflation for the United States. To obtain our estimate we combine macroeconomic theory and the theory of public choice. Macroeconomic theory gives us the equilibrium rate of unemployment, commonly known as the natural rate of unemployment. At this unemployment rate, the rate of inflation is indeterminate as it depends on government monetary and fiscal policy. Public choice theory supposes that, in their own self interest, politicians respond to the concerns of the voters. We quantify the public’s concerns with respect to inflation and unemployment and show that politicians will choose an equilibrium rate of inflation of approximately five or six per cent.

Date: 1988
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