JOHN MAYNARD KEYNES MEETS MILTON FRIEDMAN AND EDMOND PHELPS: THE RANGE VERSUS THE NATURAL RATE IN AUSTRALIA, 1965:4 TO 2003:3

In this paper we compare the estimates of the range model in Lye and McDonald (2005a) with estimates of a natural rate model. We find that the range model is superior to the natural rate model according to econometric criteria and economic plausibility. Our estimates of the range model suggest that a significantly lower rate of unemployment is obtainable at the current time by aggregate demand policy, indeed a rate of 3.1 per cent for 2003:3 compared with about 6.5 per cent for the natural rate model. Thus we conclude that basing macroeconomic policy on the natural rate model would underrate the possibilities for economic welfare in Australia.