Real interest rate drift led to 1970s inflation buildup, study finds.
The article "Natural rate doubts" examines how unemployment, inflation, and the federal funds rate in the U.S. moved together from 1970 to 1979, then shifted downward after 1979. Contrary to the common belief that inflation rose due to the Fed's passive response to higher natural unemployment rates, the study suggests that a decrease in real interest rates led to both higher unemployment and inflation. This was supported by a positive long-term relationship between unemployment and inflation in the data, challenging the idea of a fixed natural rate of unemployment.