Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU

Abstract

The American Economy of the mid-1990s has been a source of envy for the world and of puzzlement for macroeconomists. The civilian unemployment rate has remained below 5 percent for one year and below 6 percent for almost four years. Despite near universal forecasts in 1994 of accelerating inflation that would accompany a dip of the unemployment rate below 6 percent, inflation actually decelerated significantly between 1994 and 1998. This benign outcome for inflation stands in contrast to the significant acceleration that occurred when unemployment last dipped below 6 percent, in the late 1980s. The failure of inflation to accelerate allowed the Federal Reserve to avoid raising short-term interest rates after early 1997, and even to lower them in late 1998. Freed from the restraint of restrictive monetary policy that had choked earlier expansions, and with its fires stoked by the lowest medium-term and long-term nominal interest rates in three decades, the economy charged ahead and achieved a state of high growth – noninflationary bliss that some have dubbed the “Goldilocks economy” (neither too hot nor too cold, but just right). Low interest rates and low inflation combined to propel the American stock market to valuation levels without precedent, along the way creating $10 trillion of wealth in barely four years, and most of this wealth was still intact after the market correction in the summer and fall of 1998. Overcome with enthusiasm, one distinguished economist gushed, “This expansion will run forever.”

Cite this

Robert J. Gordon, Robert M.HG Solow (2003). Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU. Cambridge University Press eBooks. https://doi.org/10.1017/cbo9780511616587.024

@article{j2003foundations,
  title  = {Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU},
  author = {Gordon, Robert J. and Solow, Robert M.HG},
  year   = {2003},
  journal = {Cambridge University Press eBooks},
  doi    = {10.1017/cbo9780511616587.024}
}

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