Is the Phillips curve stable? A time-varying parameter approach

Abstract

We derive two empirical Phillips curve models based on Robert Gordon's reduced-form specification of conventional wage and price equations of a more complete structural model of the U.S. economy. One is a stochastic-coefficients model and the other is a conventional fixed-coefficients model. We used a stochastic-coefficients empirical model to investigate the volatility of the Phillips curve relationship hypothesized by many economists during the 1970s. The visual evidence of the time-varying parameter plots suggests there has been variation in the short-run Phillips curve. Comparative forecasting shows that the stochastic-coefficients model dominates the fixed-coefficients model, further supporting the hypothesis of volatility.