CHALLENGES FACING NATURAL RATE THEORY

This paper attempts to test the natural rate hypothesis by leaking at historical unemployment data for France, the UK and the US. We find th at the unemployment series can be described as stationary around an in frequently changing mean. Moreover, that the speed of convergence towa rds mean unemployment is slower when unemployment is high and differs across the three countries: the two European countries having more per sistence. We do not find any evidence that the persistence of a change in unemployment is a function of the size of the change. We conclude that the data are consistent with multiple equilibria models where lar ge shocks bring the economy from one equilibrium to another, and also with models with a moving natural rate. (C) 1997 Elsevier Science B.V.