The principal challenge to a monetary policy focused on utilization rates is that an unexpected shift in productivity growth, in effect lowers the unemployment rate consistent with stable inflation (the NAIRU) for a while.
This allows the economy to operate at a higher utilization rate without inflationary consequences, at least until the higher productivity is fully anticipated in wage bargaining or until productivity growth stops accelerating. Let me explain the source of the decline in the effective NAIRU. Assume that the increase in productivity is not anticipated and therefore does not immediately raise workers’ real wage demands.