How should central banks react if the structural unemployment rate (NAIRU) has become very low?
The absence of inflation despite the very low unemployment rate in the United States and the euro zone shows that the structural unemployment rate - the NAIRU (unemployment below which inflation increases and becomes higher than expected inflation) - is currently very low. So how should central banks respond? Either by keeping a highly expansionary monetary policy in place to try to drive the unemployment rate down to the level of the NAIRU. This is the approach taken in the United States and the euro zone; Or by realising that the “incompressible†unemployment rate, which is reached when all employable people have a job, is higher than the NAIRU, i.e. it is impossible to bring back inflation , so the central bank should change its objective.