Buffer stock approaches to inflation control

The debate over the government’s ability to create a trade-off between unemployment and inflation is longstanding in macroeconomics. More recently, it has been waged with versions of the Phillips Curve. Using the Expectations-Augmented Phillips Curve, Monetarists claimed that traditional demand management would only create accelerating inflation. Mainstream macroeconomics further entrenched the notion that only one unemployment rate is consistent with stable inflation - the natural rate or Non-Accelerating Inflation Rate of Unemployment (NAIRU). Modern Monetary Theory (MMT) breaks with the traditional Phillips Curve discourse by identifying that governments have two buffer stock approaches to maintaining price stability in a fiat monetary system: (a) the orthodox NAIRU approach, which uses unemployment buffer stocks; or (b) an employment buffer stock approach, which involves the government making an unconditional job offer to anyone who wants to work. This chapter traces the evolution of the dominant use of unemployment buffers stocks and explains how employment buffer stocks can maintain inflation stability while avoiding elevated unemployment.