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Federal Reserve Bank of Richmond
Richmond Fed Economic Brief
Monetary policy with unknown natural rates
Thomas A. Lubik
Jessica Sackett Romero
Abstract

The "unemployment gap" is an important factor in monetary policy decisions. But the size of the gap depends on the level of natural rate of unemployment, which is inherently unobservable. The uncertainty surrounding estimates of the natural rate, and the costs of mismeasuring it, may recommend a policy rule that responds to the rate of change in the actual unemployment rate rather than to the implied unemployment gap.


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Thomas A. Lubik & Jessica Sackett Romero, "Monetary policy with unknown natural rates" , Federal Reserve Bank of Richmond, Richmond Fed Economic Brief, issue Jul, 2011.
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Keywords: Inflation (Finance) ; Monetary policy ; Unemployment
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