The NAIRU (Non-Accelerating Inflation Rate of Unemployment) with Multiple Monies

The Nonaccelerating Inflation Rate of Unemployment (NAIRU) is the lowest rate of unemployment at which the inflation rate will not increase because, if it goes any lower (i.e below the ‘natural rate’), then it will increase for various reasons. Although many economists dispute the existence of a ‘natural rate of unemployment’ because it means that full employment is inherently undesirable, let us presume for the purpose of this argument that it does exist and, therefore, the worst-case scenario of full employment being intrinsically, normatively undesirable is true. It is argued here that, in this scenario, the NAIRU could actually be significantly lower in a regime where multiple monies are available to and used by agents for the purpose of optimising diverse expectations-management preferences.


Here are two significant reasons for this; firstly, the inflation rate is always measured relative to the money the sustained increase in the aggregate price-level is measured in; secondly, the NAIRU is exacerbated by labour market rigidities and, in a regime of multiple monies, the labour market would undoubtedly become more flexible because employers and workers can determine which monies to use for buying and selling labour respectively (each money entailing its own exchange rates, interest rates and an inflation rate with respect to a predefined basket of goods and services).


In a regime of multiple monies and monetary freedom, there would be multiple NAIRUs corresponding to each money since the inflation rates would be measured with respect to each money. Nevertheless, even considering a single money as the benchmark for the inflation rate, the weighted average NAIRUs across the multiple monies could be lower than the NAIRU in a Central Banking regime. To give just one example, if some monies were backed by metallic standards such as gold and silver, it would be more difficult for inflation to accelerate in the first place since there would be tangible limits to the money supply. Therefore, the weighted average across NAIRUs would be lower than the NAIRU corresponding to a single, imposed, fiat currency.


The labour market flexibility channel is also important. Essentially, workers would be free to use multiple monies and bargain for payment in them (and, conversely, employers would also be free to use the monies they want to pay them in, contingent upon workers’ preferences and bargaining positions and their own preferences). As such, the aggregate price-controls on wages in particular would no longer apply as rigidly as they did due to the monetary policies of Central Banking regimes. This would, thereby, make the ‘Minimum Wage’ and other such labour market restrictions far less potent in terms of their adverse effects on unemployment.