Long-run Phillips Curve Research Articles

The Long-Run Phillips Curve is ... A Curve

The Long-Run Phillips Curve is ... A Curve

The Long-Run Phillips Curve is ... a Curve

The Long-Run Phillips Curve is ... a Curve

Milton Friedman and the Road to Monetarism: A Review Essay

Milton Friedman and the Road to Monetarism: A Review Essay

Introduction to the Inclusion of the Real Interest Rate with other factors in Phillips Curve Analysis

This paper summarizes the arguments and counterarguments within the scientific discussion on the issue regarding the Inclusion of the Real Interest Rate with other factors in Phillips Curve Analysis. The main purpose of the article is to cause economists to consider the inclusion of the real interest rate in Philips Curve analysis. Earlier economists have examined the Phillips Curve, including Irving Fisher (1926). Later Phillips (1958, 1961) made enough of impression to give the Phillips Curve its appellation (1958, 1961). Further work has been done by Freidman, Phelps Lucas, Rapping and others. Shifts from the Short Run Phillips Curve (SRPC) to the Long Run Phillips Curve (LRPC) have been explained primarily through workers not realizing their real wage has decreased until some time has passed. Also, this shifting from the SRPC to the LRPC is due to producers thinking that demand for their products has had a real, sustained increase, producers finally realize that is not true. This article agrees with those factors being present but also posits the idea of changes in the real interest rate affecting the shift form the SRPC to the LRPC. This brief article summarizes the conclusions of five econometric papers that suggest that the real interest rate should be included in Phillips Curve Analysis. The research empirically confirms and theoretically proves that the five articles with econometric evidence suggest that the real interest rate be included in Phillips Curve Analysis. Though Austrian economists consider capital in their theories, Austrian economists do not use Phillips Curve analysis but instead employ Hayekian Triangles. The results of the research shows that inflation and unemployment have a stable and inverse relationship. These results can be useful for economic analysts, government, financial experts, policymakers.

Endogenous Growth, Downward Wage Rigidities and Optimal Inflation

Standard New Keynesian (NK) models feature an optimal inflation target well below two percent, limited welfare losses from business cycle fluctuations and long-term monetary neutrality. We develop a NK framework with labour market frictions, endogenous productivity and downward wage rigidity (DWR) which challenges these results. The model features a non-vertical long-run Phillips curve between inflation and unemployment and a trade-off between price distortions and output hysteresis that change the welfare-maximizing inflation level. For a plausible set of parameters, the optimal inflation target is in excess of two percent, a target value commonly used across central banks. Deviations from the optimal target carry welfare costs multiple times higher than in traditional NK models. The main reason is that endogenous growth and DWR generate asymmetric and hysteresis effects on unemployment and output. Price level targeting or a Taylor-rule responding to the unemployment rate can handle better the asymmetric and hysteresis effects in our model and deliver significant welfare gains. Our results are robust to the inclusion of the effective lower bound on the monetary policy interest rate.

Pricing Under Fairness Concerns

AbstractThis paper proposes a theory of pricing premised upon the assumptions that customers dislike unfair prices—those marked up steeply over cost—and that firms take these concerns into account when setting prices. Because they do not observe firms’ costs, customers must extract costs from prices. The theory assumes that customers infer less than rationally: When a price rises due to a cost increase, customers partially misattribute the higher price to a higher markup—which they find unfair. Firms anticipate this response and trim their price increases, which drives the passthrough of costs into prices below one: Prices are somewhat rigid. Embedded in a New Keynesian model as a replacement for the usual pricing frictions, our theory produces monetary nonneutrality: When monetary policy loosens and inflation rises, customers misperceive markups as higher and feel unfairly treated; firms mitigate this perceived unfairness by reducing their markups; in general equilibrium, employment rises. The theory also features a hybrid short-run Phillips curve, realistic impulse responses of output and employment to monetary and technology shocks, and an upward-sloping long-run Phillips curve.

Policy regimes and the shape of the Phillips curve in Australia

We document an evolving pattern in the slope of the Phillips curve in Australia at different frequencies under different monetary policy regimes and labor market regulations. Our estimation strategy relies on the spectral analysis that includes the gain and phase spectrum but is also complemented by the time domain estimation. We document an upward sloping medium-run Phillips curve in the pre-1977 period, a downward sloping long-run Phillips curve from 1977 to 1993, and a flattened Phillips curve from 1993 onwards. Lag and lead relationship between inflation and unemployment varies across periods and frequencies. The Phillips curve at business-cycle frequencies is downward sloping in all periods. We explain our results in terms of the monetary targeting in 1976 and the inflation targeting in 1993 by the RBA, respectively, and important changes in labor relations from the mid-1980s to the mid-1990s.

Providing an Empirical Insight into Nigeria’s Non-acceleration Rate of Unemployment

This study was necessary since inflation and unemployment are twin macroeconomic variables that exert influence on the policy decision of any economy. Using time series from 1972 to 2015, the ordinary least-squares method was employed to determine both the short-run and long-run Phillips curve to ascertain if it is evident in Nigeria. The non-accelerating inflation rate of unemployment (NAIRU) was also estimated. The results establish the presence of a negative relationship of both inflation and unemployment in the short-run and long-run unemployment, though not significant. Since NAIRU is 11.63, the policy implication is that if the economy was to achieve full employment, an unemployment rate of 11.63 per cent is inevitable.

In Search of a Long-Run Phillips Curve in the US

Although there is academic research confirming a short-run negative correlation between unemployment and inflation, the majority of studies conclude there is no long-run Phillips Curve. Deploying Phillips methodology and applying it to twelve years of US quarterly data, this study concludes there is a very strong negative correlation between unemployment and employment costs.

Positive trend inflation and the Phillips curve – A tale of two slopes and various impulse responses

Standard small-scale New Keynesian models (NKM) come with considerable output losses from moderate positive steady-state inflation when the long-run output-inflation relationship is derived from the microeconomic equations. We analyse 1. which trend-inflation-dependent parameter change might move the New Keynesian model’s long-run Phillips curve (LRPC) towards superneutrality and hence bring about a more moderate output impact of steady-state inflation and 2. whether this same parameter change also turns the linearised short-run New Keynesian Phillips curve (NKPC) into the empirically found direction across different trend inflation rates.The parameter change across trend inflation rates should be at least tentatively empirically justified. Two parameters meet our criteria: the usual suspect, the Calvo-parameter, and the intertemporal elasticity of substitution. Last but not least, allowing these parameters to change across trend inflation rates produces impulse responses more in line with “stylised facts” than those of a constant parameter trend inflation model. We consider the impact of each trend-inflation-dependent parameter separately but also a combination of the two.

Breaks and the statistical process of inflation: the case of estimating the ‘modern’ long-run Phillips curve

‘Modern’ theories of the Phillips curve inadvertently imply that inflation is an integrated or near-integrated process, but this implication is strongly rejected using US data. Alternatively, if we assume that inflation is a stationary process around a shifting mean (due to changes in monetary policy), then any estimate of long-run relationships in the data will suffer from a ‘small-sample’ problem as there are too few stationary inflation ‘regimes’. Using the extensive literature on identification of structural breaks, we identify inflation regimes which are used in turn to estimate with panel data techniques the US long-run Phillips curve.

Unemployment And Inflation: Evidence Of A Nonlinear Phillips Curve In The Eurozone

The classical Phillips curve shows a negative relationship between inflation and unemployment. However, various studies have documented temporal positive and negative relationships between inflation and unemployment, leading to strong criticisms against the Phillips curve. In particular, the triangle approach indicates that the nature of the inflation-unemployment nexus is contingent on the source of the shocks, the length of lagged responses, and the policy response. Similarly, the strong linearity assumption on which the Phillips curve rests may have led to its empirical failure. Prior studies have modelled the possibility of threshold effects in the Phillips curve but no study has established the thresholds of when the relationship switches from negative to positive in the eurozone. This paper addresses this limitation using 11 eurozone countries for the period of January 1999 to February 2017. The paper also estimates both short- and long-run Phillips curves for these countries. We found that, by assuming linearity, there exists a Phillips curve in the short and the long run. We also established that the linearity assumption in the classical Phillips curve might be too strong since there is evidence of threshold effects. The thresholds in unemployment were 5.00% and 6.54%. By estimating the Phillips curve using these thresholds, we found that the relationship between inflation and unemployment is only negative when unemployment is lower than 5.00%. The negative relationship turned positive when unemployment was between 5.00% and 6.54%. Inflation and unemployment are unrelated once a threshold of a 6.54% unemployment rate is surpassed. These findings do not only highlight the importance of threshold effects in the Phillips curve, they also shed light on the need to fight unemployment in the eurozone.

Lucas's Research in the Late 1960s and the Natural Rate of Unemployment

This article describes the work of Robert E. Lucas Jr. in the late 1960s, which culminated in the modeling and testing of the natural rate of unemployment hypothesis. I show the roles played by Edmund Phelps and Edward Prescott in Lucas's transition from adaptive expectations to rational expectations in the modeling and testing of this hypothesis. I argue that Phelps criticized the predominance of the regressive effect in price expectations in Lucas and Rapping's (1969a) labor market model as the explanation to the tradeoff between inflation and unemployment and also introduced Lucas to his island model, which would be eventually adopted by Lucas (1972). I also argue that Prescott helped Lucas in the substitution of the adaptive expectations with the criticized regressive effect hypothesis by the rational expectations hypothesis, by working on its mathematical definition and debating the proper justification for its adoption. Finally, I show how the discussion over the substitution of the adaptive expectations by the rational expectations led Lucas to change his econometric testing of the natural rate of unemployment hypothesis from estimating long-run Phillips curves in a model with adaptive expectations to testing restrictions on the relationship between policy parameters and behavioral parameters of a model with rational expectations.

Positive Trend Inflation and the Phillips Curve - A Tale of Two Slopes

A small-scale New Keynesian model comes with considerable output losses from moderate positive steady-state inflation when the long-run output-inflation relationship is derived from the microeconomic equations. We analyse: 1. whether allowing for parameter change with trend inflation might move the New Keynesian model's long-run Phillips curve (LRPC) towards superneutrality and hence bring about a more moderate output impact of steady-state inflation and, 2. whether this same parameter change also turns the linearised short-run New Keynesian Phillips Curve (NKPC) into the empirically found direction across different trend inflation rates. We require the parameter change across trend inflation rates to be at least tentatively empirically justified. Two parameters meet our criteria: the usual suspect, the Calvo-parameter, and the intertemporal elasticity of substitution.

JOB TURNOVER, TREND GROWTH, AND THE LONG-RUN PHILLIPS CURVE

The paper reexamines the long-run Phillips curve in a New Keynesian model with job turnover and trend productivity growth. We show that an increase in money growth has substantial positive effects on steady state output, consumption, and employment in the presence of (i) observed job turnover rates and, if consumption smoothing is sufficiently strong, (ii) observed productive growth rates. Furthermore, we show that the optimal inflation rate is slightly under 2% for reasonable calibrations of job turnover and trend growth.

The Distribution of Power and the Inflation-Unemployment Relationship in the United States: A Post-Keynesian Approach

This paper presents a theoretical explanation for the enigmatic discontinuity of the relationship between inflation and unemployment that has registered the U.S. economy since the early 1950s onwards. I argue that by distinguishing between two different historical episodes after World War II, the Golden Age and the Age of Decline, some insights in the Phillips curve puzzle can be gained and the analysis helps us to substantiate the existence of both downward sloping and upward sloping species of the curve. The regime change is illustrated here by building on a commonly used Post-Keynesian model of distribution and growth, which is enhanced to allow for an inflation process based on a conflicting claims approach and a growth rate form of Okun’s law. The model shows that the long-run Phillips curve can be either downward-sloping or upward-sloping, conditioned to the distribution of market power between business and labor.

The long-run Phillips curve: A structural VAR investigation

Both cointegration methods, and non-cointegrated structural VARs identified based on either long-run restrictions, or a combination of long-run and sign restrictions, are used in order to explore the long-run trade-off between inflation and the unemployment rate in the post-WWII U.S., U.K., Euro area, Canada, and Australia. Overall, neither approach produces clear evidence of a non-vertical trade-off. The extent of uncertainty surrounding the estimates is however substantial, thus implying that a researcher holding alternative priors about what a reasonable slope of the long-run trade-off might be will likely not see her views falsified.

“Adaptive Expectations” of Milton Friedman and Monetarists and Phillips Curve; And the Comparison of them with Other Macroeconomic Schools

AbstractThe focus of this article is the “adaptive expectations hypothesis” of Milton Friedman and his analysis of short-run and long-run Phillips Curve. In order to analyze these contributions of M. Friedman more clearly, discussions about the Phillips Curve and different views about this issue according to various macroeconomic schools and information about the evolution of the Phillips Curve Analysis are given. In this sense, apart from Milton Friedman and Monetarists, Phillips Curve was analyzed in a successive order compatible with the history of discussion within Keynes and Keynesian economics, New Keynesian Economics and New Classical School operating with “rational expectations hypothesis”.

The Possible Unemployment Cost of Average Inflation below a Credible Target

If inflation expectations become firmly anchored at the inflation target even when average inflation deviates from the target, the long-run Phillips curve becomes nonvertical. During 1997–2011, average inflation expectations in Sweden have been close to the inflation target of 2 percent, whereas average inflation has fallen short of the target by 0.6 percentage points. The estimates reported suggest that the slope of the long-run Phillips curve is about 0.75. Then the average unemployment rate has been about 0.8 percentage points higher than if average inflation had been on target. This is a large unemployment cost of undershooting the inflation target. (JEL D84, E24, E31, E52, E58)

Dynamic Monetary Theory and the Phillips Curve with a Positive Slope

Don Bellante and Roger W. Garrison (1988) compared two alternative approaches to monetary dynamics: those based on a vertical long-run Phillips Curve and those derived from analysis of Hayekian triangles. The conclusion the authors reached is that the only factor differentiating the two models is the process whereby the initial cause is converted into the final neutral effect. This article refutes that conclusion. To do so it suffices to demonstrate that the long-term effect of monetary policy is never neutral. While it is true that after the boom-bust cycle the economy returns to the of unemployment, the crucial point is that the natural rate at the end of the cycle is quite different from the one evident at the start. This requires an Austrian Phillips Curve with a positive slope.