The more interesting question, I think, is: Should we use the natural rate hypothesis in forecasting and expect it to materially affect our forecasts over the next three years? And the answer, I think, is: no. The gearing of inflation on its past is low, and there is little impact of unemployment on inflation in the short run. Plus there is no good reason to think anything like the natural rate hypothesis holds near zero inflation: **Olivier Blanchard**: *Should We Reject the Natural Rate Hypothesis?*: "Fifty years ago, Milton Friedman articulated the natural rate hypothesis... the natural rate of unemployment is independent of monetary policy.... there is no long-run trade-off between the deviation of unemployment from the natural rate and inflation...

...Both propositions have been challenged.... Evidence is suggestive, but not conclusive. Policymakers should keep the natural rate hypothesis as their null hypothesis, but keep an open mind and put some weight on the alternatives....

The basic implications of deviations from either the independence hypothesis or the accelerationist hypothesis, or both, can be shown simply.... Assume that (the log of) potential output, y

^{*}follows: y^{*}(+1) = ay^{*}+ b(y − y^{*}), where a ≤ 1. Potential output next period, y*(+1), depends on potential output today and on the deviation of actual output from potential output today.... The parameter b captures the effect of the output gap on potential output, and the parameter a captures the persistence of the effect.... In most models (and in reality), b is likely to be positive and a to be less than one.... Assume that the relation between inflation and output is given by:π = c(y − y

^{*}) + Eπ,where:

Eπ = 0 for − x ≤ π ≤ x, π(−1) otherwise,

where π(−1) is the rate of inflation last period....

The general conclusion.... Failure of either of the hypotheses leads to a more attractive trade-off between output and inflation, and, in the presence of shocks, suggests a stronger role for stabilization policy. If the independence hypothesis fails, adverse shocks are more costly, and stabilization policy more powerful. If the accelerationist hypothesis fails, there is more room for stabilization policy to be used at little inflation cost....

Where does this leave us? It would be good to have a sense of the values of a, b, c, and x, or more generally, a sense of the specific channels at work. The empirical part of this paper has shown that we are still far from such an understanding. Thus, the general advice must be that central banks should keep the natural rate hypothesis (extended to mean positive but low values of b and a) as their baseline, but keep an open mind and put some weight on the alternatives. For example, given the evidence on labor force participation and on the stickiness of inflation expectations presented earlier, I believe that there is a strong case, although not an overwhelming case, to allow US output to exceed potential for some time, so as to reintegrate some of the workers who left the labor force during the last ten years.

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