Vítor Constâncio: Past and future of the European Central Bank
monetary policy
Speech by Mr Vítor Constâncio, Vice-President of the European Central Bank, at the
Conference on "Central Banks in Historical Perspective: What Changed After the Financial
Crisis?", organised by the Central Bank of Malta, Valletta, 4 May 2018.
* * *
Ladies and Gentlemen,
It is a pleasure to be here today and participate in this celebratory event for the 50th anniversary
of the Central Bank of Malta. In accordance with the conference theme, I would like to take this
opportunity to adopt a historical perspective and offer some reflections on monetary policy in
the euro area over the past two decades. I will start with a review of the ECB journey from
1999 to date, to highlight the evolution of the practice of monetary policy in the euro area over
this period. I will then draw some lessons from this experience, both for economic thinking and
monetary policy making.
The ECB journey
As you all know, the Treaty on the European Union defines the contours of monetary policy in
the euro area. According to Article 127 of the Treaty, price stability is the primary objective of
monetary policy in the euro area. It is only without prejudice to the objective of price stability
that monetary policy can support the general economic policies in the Union. This high-level
mandate enshrined in the Treaty is the cornerstone of all ECB decisions and has remained
unchanged over its two decades of existence.
Within the boundaries of the Treaty, however, the practice of monetary policy in the euro area
has undergone a process of transformation over time. While the transformation has often been
gradual, four key phases can be clearly identified.
First Phase: Monetary policy beginning and adjustment (1999-2003)
The first phase starts with the launch of the single currency and lasts until the revision of the
monetary policy strategy in May 2003, when the weight of the monetary pillar and the
"dominant role of money" were demoted and the framework got closer to the flexible inflation
targeting regime adopted by many other central banks around the world.
In the preparation for monetary union, a document published in 1997 by the ECB predecessor,
the European Monetary Institute, explained why both a monetary aggregates targeting strategy
and an inflation targeting regime were not considered fully appropriate for the euro area.[1]
The first regime, which was followed by the Bundesbank, in a tradition that understandably
exerted a crucial influence on the initial ECB decisions, was refused for the practical reason
that money demand functions at the European level would not be stable enough to allow for a
reliable calibration of a M3 target. The refusal of pure inflation targeting was justified by the
theoretical reason that it did not allow a role for money.
One of the first decisions of the Governing Council, already in 1998, was to announce the
adoption of a "stability-oriented monetary policy strategy" to attain the goals set out in the
Treaty. The strategy was a sort of hybrid based on the two main strategies previously examined
and characterised by the following key elements, as described in the ECB's Monthly Bulletin
of January 1999: "The strategy consists of three main elements: (i) a quantitative definition of
the primary objective of the single monetary policy, namely price stability; and the "two pillars"
of the strategy used to achieve this objective: (ii) a prominent role for money, as signaled by
the announcement of a reference value for the growth of a broad monetary aggregate; and (iii)
a broadly based assessment of the outlook for future price developments and the risks to price
stability in the euro area as a whole."
There was clearly a dominant first pillar with a reference value initially set at 4.5% growth rate
for M3. The text further explained: "To signal the prominent role it has assigned to money, the
Governing Council has announced a quantitative reference value for monetary growth as one
pillar of the overall stability oriented strategy". So, some trace of technical monetarism[2] was
implicitly present. In 2006, explaining the origin of the "two pillars", Otmar Issing quoted former
President Wim Duisenberg's reply to a question by a journalist in 1999: "it is not a coincidence
that I have used the words that money will play a prominent role. So, if you call it the two pillars,
one pillar is thicker than the other is or stronger than the other, but how much I couldn't tell
you".[3]
The reference value for the monetary aggregate M3 was considered a relevant variable for
inflation assessment and was related to the theoretical approach of technical monetarism in
that money predicts inflation and differs from credit or other aggregates. The reference value
for M3 annual growth was calculated to be 4.5% and was used to produce a monetary
overhang: the difference between actual M3 growth and the reference value, with higher
numbers representing higher risks for medium term inflation.
The monetary policy framework announcement sparked a lively debate in the academic
community, regarding the differences between the ECB approach and the inflation targeting
regime.[4] There were criticisms about the ambiguity of having two seemingly different
approaches, one close to monetary targeting (the reference value) and another related to a
public commitment of a quantified inflation target (less than 2%), an element of utmost
importance in an inflation targeting regime.
The sobering experience of the following few years with the framework, determined the need
for clarifications and ultimately for a revision of the strategy. Since 2001 the growth of M3
started to accelerate to values well above the 4.5%, registering 10.9% in December 2001 and
in December 6.6% in 2002[5] . It thus suggested significant risks for inflation that the behavior
of prices did not show, even when considering meaningful lags. In fact, the money demand
function became clearly unstable since 2001 and did not justify the use of a concept like the
reference value referring to the medium-term of up to two years which is the operational
horizon for monetary policy decisions.[6] The continuous need to try to explain away the growing
monetary overhang without corresponding inflation in the horizon, was turning into an
embarrassing exercise.
Consequently, in May 2003, the ECB published a review of the monetary policy framework
including the following elements. First, the medium-term target for inflation was redefined to a
value "below but close to 2%"; second, the presentation of the monetary policy decisions would
start with the "economic analysis to identify short- to medium-term risks to price stability"; third,
the monetary analysis would "mainly serve as a means of cross-checking, from a medium- to
long-term perspective, the indications coming from the economic analysis; fourth, the review
of the reference value on an annual basis was dropped. While still at 4.5%, the reference value
has, in fact, not been mentioned or used since then. The monetary pillar became thinner.
Finally, in June 2004 the ECB started publishing its staff macroeconomic projections for the
euro area. In my assessment, the decisions taken in 2003 and 2004 were important steps
towards a higher degree of transparency and accountability and made the ECB strategy even
more aligned with inflation targeting. I therefore believe that the ECB's monetary policy strategy
can be seen as consistent with the broad features of flexible inflation targeting as described in
Svensson (2008). It includes: first, an announced numerical inflation target; second, monetary
policy decisions that make the inflation forecast published by the central bank, converge to this
numerical target, and third, a high degree of transparency and accountability.[7] Naturally, this
does not mean that all central banks do not look at what is happening with monetary
aggregates, especially credit, as they have information content. In the same way, central banks
also follow general financial conditions. In both cases, however, central banks cannot extract
quantitatively precise calibration on what will happen to inflation from those monetary and
financial variables.
Second Phase: Monetary policy until the financial crisis (2003-2007)
The period spanning from the revision of the monetary strategy to the beginning of the crisis
in 2007 coincided with the build-up of macroeconomic imbalances in several member
countries. With hindsight, the ECB has been criticised for not helping prevent that
development. I do not agree with such criticism as it ignores that a single monetary policy
cannot cater for heterogeneity across member states.
Rates were increased in December 2005 as there was evidence that strong growth was
contributing to a rise in inflation above 2%, with a rate of 2.5% in the third quarter of that year.
Curiously, the interest rate decision was criticised at the time by a number of commentators[8]
and even by some policy institutions. However, the IMF's economic outlook of April 2005
considered that monetary policy in the euro area "should remain firmly on hold".[9] A similar
recommendation was issued by the OECD in November 2005.[10] With the benefit of hindsight,
most observers now agree that the tightening decision in December 2005 was appropriate.
Let me emphasise however, that this conclusion does not imply that monetary policy interest
rates are the best tool to respond to financial imbalances with what is called "leaning against
the wind" policy. I do not believe that monetary policy should be normally used to prevent the
build-up of financial imbalances. The main reason is that, due to the imperfect synchronisation
of financial and business cycles, leaning against the wind would pose an intertemporal
tradeoff in achieving price stability.[11] More precisely, "leaning against the wind" requires
intentionally producing deviations from price stability over the short- to medium-term, as a
precautionary move against the risk of a future financial crisis. Its benefit would be to help
prevent potentially larger deviations from price stability over the medium- to long-term, once
the financial crisis occurs. The risks of this approach are to increase the amplitude of business
cycle fluctuations and hinder the credibility of the central bank regarding its inflation objective,
while only marginally reducing the probability of financial crises.
My conclusion is that the costs of "leaning against the wind" are likely to exceed benefits as I
illustrated in a recent intervention applying the methodology developed by Lars Svensson to
the euro area.[12] Macroprudential policy should be the main policy tool to respond to the
buildup of financial imbalances. In this respect, the fact that monetary policy "gets in all the cracks"
of the financial system was seen as an advantage by Jeremy Stein. However, it can easily
become a significant inconvenience if it creates an unnecessary recessionary episode or when
in a monetary union, a financial instability episode is not generalised across all countries.[13]
Indeed, some influential authors have pointed out that a tightening of monetary policy could,
in some cases, even boost the bubbly component of stock prices, or increase house price
imbalances through debt deflation effects.[14] This requires strong macroprudential policies to
complement monetary policy in order to achieve both price and financial stability.
The third phase: global financial crisis and Great Recession (2008-2013)
The third phase marks an abrupt change in euro area monetary policy. It can be identified as
a result of the financial crisis of 2007, and especially its intensification after the bankruptcy of
Lehman Brothers in September 2008. However, in July 2008, overreacting to a reading of 4%
in headline inflation related to oil price developments we took the controversial decision to
increase the policy rate to 4.25%. Following the dramatic effects of the Lehman bankruptcy,
rates were subsequently cut three times to a level of 2.5% in December 2008. A broad policy
of liquidity provision to the banking sector replacing auctions by the fixed rate full allotment
regime was introduced in October and kept until this day.
The operational approach was to calibrate each measure to address the specific market
impairment prevailing at that point. For example, liquidity was provided at much longer
maturities than usual to help alleviate tensions exacerbating the maturity mismatch on the
banking sector's balance sheet. The list of eligible collateral was also expanded to ease the
shortages that emerged during the crisis.
A direct implication of the activity of eased liquidity provision to the market was the increase in
the size of the ECB balance sheet. The increase in financial institutions' demand for ECB
liquidity led to a progressive, and sizable, increase in bank reserves. This was accentuated by
the effects of the SMP programme under which the ECB boldly intervened since 2010 with
purchases of government bonds of countries where monetary policy transmission had been
severely impaired as a result of excessive market pressures. Between 2007 and mid-2012, the
size of the ECB's balance sheet more than doubled. Clearly, the larger balance sheet was then
not the objective of our non-standard measures, but rather the result of the lender of last resort
function to the market. Indeed, as the funding situation in the banking sector started improving
in mid-2012, the ECB balance sheet slowly began to contract without any adverse effects.
Some commentators were nevertheless concerned by the increasing size of the ECB balance
sheet. Based on the high long-run correlation between inflation and money growth, they
interpreted the huge growth in the ECB monetary base as a signal of future high inflation risks.
These fears obviously disregarded three things: first, no theory of inflation is directly related
with the central bank's balance sheet; second, the relationship between the monetary base
and the broad monetary aggregates is unstable and, in fact, during that period monetary
aggregates did not increase in response to the expansion of central bank liquidity; third, that
the crisis implied a shock to money demand that totally disrupted any potential relationship
between monetary aggregates and inflation. This assessment has been vindicated by
subsequent developments. Almost ten years after the initial increase in size of the ECB
balance sheet, the problem in the euro area remains one of too low, rather than too high,
inflation.
In the opposite direction, concerns were also voiced about the reduction in the ECB's balance
sheet size beginning in 2012 and a possible link to the recession and low inflation period that
followed. This view is compounded by the criticism of the two policy rate increases in April and
July of 2011, taking it from 1% to 1.5%. This episode and the double dip in growth deserve
therefore further comment. Those rate increases came on the wake of developments in the
first half 2011, showing economic growth slightly above 2% and with inflation attaining 2.75 %
in the second quarter. We were also overly influenced by growth forecasts which turned out to
be excessively optimistic. Blanchard and Leigh, who also point out that many other forecasting
institutions made recurring errors on euro area growth during this period, make an independent
validation of this hypothesis in their 2013 paper.[15] The authors argue that this is due to an
underestimation of fiscal multipliers, which in turn led to an underestimation of the
contractionary effects of the fiscal consolidation plans announced in early 2010.
With hindsight, it is now clear that increasing interest rates during this phase was premature.
The economy weakened markedly after the summer, on the wake of the acute market
pressures on the sovereign debt of Spain and Italy that led to a second round of interventions
in the sovereign bond markets under the Securities Market Programme (SMP). The two
consecutive rate hikes were quickly reversed in November and December of that same year.
In view of the long lags of monetary policy effects, it is obvious that the quick succession of
increases and reductions of policy rates cannot be responsible for the recessionary episode of
that period. What really was responsible for the recession of 2012/2013 was the coordinated
fiscal consolidation in which all member states engaged. A working paper published by the
European Commission estimated that collective fiscal consolidation led to cumulative
deviations from the baseline growth in 2011-2013 from 8% in Germany to 18% in Greece.[16]
Another paper finds a loss deviation from baseline between 14% to 20%, for the euro area
GDP during the same period.[17]
Monetary policy continued to help the situation when, at the end of 2011, the ECB introduced
two three-year longer-term refinancing operations implemented in December 2011 and
February 2012 amounting to EUR 1 trillion. This measure and the correction of the two rate
hikes contributed to attenuate the severity of the 2012 recession.[18] The announcement of the
Outright Monetary Transactions (OMT) programme in 2012 further contributed to preventing
an even worse deterioration of economic conditions by removing redenomination risk, which
had become an important source of macroeconomic uncertainty. The programme facilitated
an ease of tension in all financial markets, which was accompanied by a slow, but progressive
return of spreads towards normal levels. Altogether, with the second round of sovereign bond
purchases in 2011, the liquidity supplied at end-2011 and the OMT announcement, the ECB
put an end to the euro area acute existential crisis.
The fourth phase: ultra-low inflation and QE (2014-today)
This brings me to the fourth and current phase of monetary policy in the euro area. In 2013,
the euro area recovery had not yet gained traction. In spite of the ultra-low level of interest
rates, renewed deflationary risks emerged with a progressive fall of inflation towards levels
significantly below 2 percent. In contrast with the previous five years, financial disruptions could
no longer be responsible for the economic slowdown. The coincident reduction of output and
inflation suggested that the renewed economic weakness was driven by a negative aggregate
demand shock. In turn, the negative demand shock could be the delayed result of the fiscal
policy tightening since 2010, or possibly the consequence of weakened economic sentiment
after two recessions.[19]
Maintaining price stability in the face of insufficient aggregate demand and downward
inflationary pressures required a more expansionary monetary policy stance. In response to
these developments, a new phase in non-standard measures was launched, including
increasing the balance sheet with asset purchases. The new non-standard policies were not
merely expected to undo any remaining financial market impairments, but to further ease the
monetary policy stance at a point where policy rates had reached their lower bound. In July
2013, in response to the contagion of increased bond yields resulting from the "taper tantrum"
in the U.S., the ECB had already introduced the non-standard policy of forward guidance,
indicating its intention to keep interest rates at prevailing or lower levels "for an extended period
of time". As inflation continued to decelerate from October 2013, falling under 1%, a
comprehensive package of expansionary measures[20] was announced in June 2014 including:
a cut in policy rates and a negative deposit facility rate; two asset purchase programmes for
asset backed securities (ABS) and covered bonds (CBPP), and a facility to provide
longerterm funding to banks for new loans, contingent on bank credit supply behaviour, which we
refer to as targeted longer-term refinancing operations (TLTRO). In January 2015, the
largescale asset purchase programme (APP) was extended to include purchases of sovereign
bonds.
A growing number of studies about the impact of APP suggest that the programme was
effective in lowering spreads on long-maturity assets and thereby boosting inflation and
growth.[21] These studies also highlight that the APP announcement contributed to a
reanchoring of inflation expectations by reversing their previously observed decline. From a
simpler perspective, we can state today that three years of large-scale asset purchases have
eliminated the risk of prolonged deflation. This fact is incontrovertible and should be admitted
by both the early APP critics and those who claimed it was unnecessary.[22] Nevertheless, we
should remain aware that the precise channels of transmission of Quantitative Easing (QE)
are still imperfectly understood and they do not relate to technical monetarism. I think that
making progress in our theoretical understanding of QE remains an important research priority
for central banks, especially in view of the possibility that nominal interest rate will be more
persistently low in the future, and thus that the effective lower bound constraint will be hit more
frequently.
A particular aspect of QE programmes that needs to be investigated further regards its
distributional effects. As an instrument of monetary policy accommodation, the APP led to an
increase in economic activity, which was especially beneficial for those individuals who, as a
result, found a job after being unemployed. At the same time, the APP increased the value of
financial assets and thus led to capital gains for the holders of those assets. Improving our
understanding of the relative strength of these distributional effects is also an important priority
for central banks. Ongoing work at the ECB suggests that the decline in unemployment that
followed the introduction of the APP had a disproportionately positive impact on low-income
households.[23] The net overall impact of APP has therefore reduced income inequality.
Furthermore, as a result of housing price increases associated with the economic recovery,
the same positive outcome took place with respect to wealth distribution.
Implications for the future
The ECB journey that I have recalled here can give rise to two obvious questions. The first one
relates to economic analysis: were the mainstream macroeconomic models used before the
crisis appropriate to help guide policy decisions, or should these be changed? The second
question relates to the monetary policy strategy: should lessons' learnt in the journey be
reflected in a change of central banks' monetary policy strategies?
Implications for macroeconomics and monetary theory
Let me start with the first question. The shortcoming of mainstream macroeconomics and of
the type of Dynamic Stochastic General Equilibrium (DSGE) models that prevailed before the
crisis, are by now quite well known.[24]
Besides extending DSGE models to include macro-financial linkages, the ECB decided to
develop a new Multi-Country model starting from the premise that, in the words of Olivier
Blanchard, "policy models" cannot be expected to have the same tight structure as "theory
models".[25] A semi-structural approach along the lines of the Federal Reserve's FRB/US model
has been adopted.[26] We can therefore put more emphasis on the model's ability to provide
sound quantitative predictions. When introducing financial frictions, we have relied on a
reduced form representation that is consistent with different theoretical micro-foundations. This
more flexible, semi-structural approach allows us to model a wide range of banking and
financial variables, going from bank lending spreads to term premia, without taking a stance
on the theoretical fundamental debate about how they are linked to the macroeconomy.[27]
A crucial theoretical aspect which requires improvement is related to the Phillips curve, the
most commonly used empirical model of inflation that faces several estimation problems as it
uses several unobservable variables.[28] It started as a relationship between wage growth and
unemployment and later, prices or inflation substituted wages. In 1967-8, Phelps and Friedman
introduced expectations as a variable that shifted the previously considered stable relationship.
Jointly with this change, Friedman added the concept of a fixed Natural Rate of Unemployment
(NARU), determined only by supply factors, to which the economy would tend in the long-term.
The difference between actual unemployment and this long-term unemployment rate became
the variable used as proxy for demand pressure in the market of goods and services, seen as
the main theoretical cause of inflation. Inflation was an excess demand phenomenon and
demand could be controlled by monetary policy - via monetary aggregates for Friedman or
with interest rates, as believed today. In practice, estimates of a Non-Accelerating Inflation
Rate (NAIRU) are what is obtained instead of the unobservable long-term NARU, which are
doubtfully deemed to be the same.
In the late 1970s, two different research approaches emerged, thus characterised by Robert
Gordon[29] : "The left fork in the road,... is the resurrection of Keynesian economics in the form
of a .... Phillips Curve (PC) model that incorporates long-run neutrality and an explicit role of
supply shocks in shifting the Phillips Curve up or down, together with an interpretation of the
influence of past inflation as reflecting generalized inertia rather than expected inflation. The
right fork in the road of the post-1975 evolution, features an approach developed by Kydland,
Prescott and Sargent, and more recently by Galì and Gertler and others. Inflation depends on
forward-looking expectations, and expectations respond rationally to actual and expected
changes in monetary and fiscal policy. This two-way game has no room for supply shocks or
inertia". This second approach produces what is called the New Keynesian Phillips Curve
(NKPC) that basically focuses on the output gap and expectations and is a crucial part of the
DSGE models, where the interest rate is all-powerful to control demand and therefore inflation.
Gordon and others forged ahead with the first approach, adding variables representing supply
shocks (as prices depend on demand and supply factors), inertia represented by long lags of
inflation and a time-varying NAIRU determined by a simple stochastic process. To this day,
using this so-called "triangle approach", Gordon continues to obtain very good results in
predicting inflation out-of-sample[30]. In 2013, Gordon shows that his model "can estimate
coefficients up to 1996 and then in a 16-year-long dynamic simulation, with no information on
the actual values of lagged inflation, predict the 2013 value of inflation to within 0.5 percentage
point. The slope of the PC relationship between inflation and the unemployment gap does not
decline by half or more as in the recent literature, but instead is stable."
This last aspect is particularly important as it highlights one of the puzzles found in the second
approach of the NKPC, since Roberts[31] obtained the result of a 50% decline in the slope
coefficient for the U.S. in 2006. As is to be expected, the value of that coefficient depends on
the entire specification of the regression. When it does not use supply-side variables, assumes
inflation lags with coefficients that add to 1, and a constant NAIRU, as in the NKPC specified
by Roberts, it is natural that the low inflation environment of the period shows up in a declining
slope coefficient.
The problem is that the NKPC did not perform empirically well from the start. Many ad-hoc
remedies have been tried in order to make it work, even when they did not conform to the pure
theoretical paradigm of the model. First, lags of inflation were introduced by Galì and Gertler
(1999) to create the so-called hybrid NKPC.[32] This hybrid model has faced many difficulties in
predicting inflation with acceptable accuracy, even when embedded in DSGE models. As I
mentioned in another intervention[33]: "As King and Watson (2012)[34] highlight when using the
labour income share or unit labour costs the models do not capture that the last 15 years do
not show a co-movement of inflation with the significant decline of those ULCs". Gürkaynak,
Kisacikoglu and Rossi (2013)[35] also illustrate the subpar performance of DSGE models to
forecast inflation. In their encompassing survey, Mavroeidis, Plagborg-Møller and J. Stock
(2014)[36], also conclude that, "we are unable to pin down the role of expectations in the inflation
process sufficiently accurately for the results to be useful for policy analysis".
Many other transformations have been attempted to make variants of the hybrid model perform
better. One way is to focus on core inflation on which the missing supply factors may be less
important. Another approach is to take expectations from consumer surveys or professional
forecasters, which of course are not microfounded.[37] In some estimates, the price of oil or the
full price of imports is introduced as an ad-hoc element within the paradigm. Time-varying
coefficients and NAIRUs are also used. So, pragmatically adjusted, hybrid NKPCs can be
made to work, especially for core inflation. This specification is quite distant from the initial
pretensions of the NKPC and from rationale of DSGE models where everything is
microfounded and subject to rational expectations. The two strands of the literature identified
by Robert Gordon seem to have undertaken some convergence.
An important source of the Phillips curve's poor performance can be the mis-measurement of
the output gap and the NAIRU. An important part of the under-prediction of inflation in recent
years may be the result of an underestimation of the slack in the economy. This is illustrated
by the fact that we better predictions of inflation can be obtained when the broad concept of
unemployment is used (e.g. U6, which is at 16% for euro area) instead of the usual measure
of unemployment (standing at 8%). Usual measures of slack can vary substantially across
methods and chosen variables, although they tend to agree on the timing of peaks and troughs.
The fact that economic activity is multidimensional suggests that there might be advantages in
using large dynamic models to estimate it. For instance, ECB staff used a dynamic factor model
that performs a trend/cycle decomposition of real activity variables and core inflation.[38] Using
different sets of variables and trend assumptions, they get different measures of the output
gap. One way to discriminate among different estimates of the output gap is to check their
ability to forecast inflation. It turns out that the variants associated with a continuation of a
positive growth trend, implying a wider output gap, are the ones that produce better inflation
forecasts. The best variant from this perspective implies that the output gap was as large as
6% in 2014 and 2015, on average, an estimate which is considerably more negative than most
official estimates, hovering between -2 and -3% for those years.[39] Results for 2017 still
continue to show a quite meaningful negative output gap, instead of one already close to zero
as reported by several international institutions. This points to the great uncertainty behind the
estimation of the output gap, the same being true about the concept of an unemployment gap
more directly involving the NAIRU.
In any case, what matters is that it is possible to find specifications that can be used as fairly
good inflation forecasting tools. Either NKPC or Traditional Keynesian Phillips Curves (TKPC)
can achieve that. For instance, in their estimations of the Non-Accelerating Wage Rate of
Unemployment (NAWRU), the European Commission has used the NKPC for 21 countries
and the TKPC for 7 countries.[40] In recent ECB work about understanding the low inflation
environment, a variant of the hybrid NKPC for core inflation was used but with the inclusion of
import prices, lagged inflation and expectations taken from surveys.[41] Using that pragmatic
specification, acceptable forecasting results are obtained and we find that the slope has been
increasing in recent years. This is a source of confidence that our policy, having contributed to
the recovery, will in the end contribute to achieve our inflation goal.
Another question related to the PC, beyond the forecast of inflation, refers to the interpretation
and use of the NAIRU that can be extracted from it. It is common to see it as equivalent to the
Friedman's NARU, a long-term structural rate of unemployment totally dependent on
supplyside factors like demogr