Phillips Curve Research Articles

Unemployment-Inflation Relationship in Germany

The Federal Republic of Germany has been one of the historically remarkable countries socially and economically. In this context, one of the outstanding issues is undoubtedly the correlation between unemployment and inflation, which is at the intersection of economy and social policy. Therefore, in the study, the unemployment-inflation trade-off in Germany was examined with the help of macroeconomic data in the context of the Modified/Original Phillips Curve, which explores the unemployment-inflation relationship. The empirical study method is time series analysis, and the monthly data set covers the period from January 1992 to April 2023. According to the study's findings, no causality relationship could be detected between unemployment and inflation variables in Germany in the period, neither in the long run nor in the short run. Therefore, it shows that the German economy does not have to put up with the inflation problem in the fight against unemployment and the unemployment problem in the battle against inflation. In this respect, it would be beneficial to thoroughly examine the German labour market structure and monetary policy strategy in the literature.

Conflict Inflation and the Role of Monetary Policy

ABSTRACT The aim of this study is twofold: on the one hand, to provide evidence of the positive association between the inflation rate and the labor share in the US; on the other, to show that monetary policy slows inflation by depressing the labor share. With the help of Bayesian econometrics, the paper shows evidence of a conflict Phillips curve. Furthermore, a structural vector autoregressive model reveals the detrimental effects of interest rate hikes on the labor share. Together, these results mean the monetary policy of administered interest rates resolves the class conflict in favor of capital to control inflation. Scrutiny of the US monetary policy development and a model of a controlled predator-prey system prepare the way for the empirical sections. Finally, the paper concludes that controlling the distributive conflict matters for impinging on inflation and that the Fed might follow alternative monetary rules to cease being the third party participating in the distributive conflict.

Can the Phillips curve provide answers to current high inflation rates

Motivated by the weak response of the inflation rate to the tight labor market, the Federal Reserve (Fed) Bank stepped away from its longstanding preemptive policy to fight inflation as the economy approached full employment. This paper aims to reevaluate the relationships of four measures of inflation with the unemployment rate. We accomplish this task by allowing the Phillips curve (PC) slope to vary over time and depend on the magnitude of the unemployment gap. Assessed by both PC convex specification assessment and the Markov chain Monte Carlo (MCMC) estimation method, we confirm the convexity of the PC when the unemployment gap is negative. In addition, we show that the slope of the PC more than doubled when we allow the coefficient on the economic slack to vary over time. Thus, our study shows that PC is still a relevant tool for guiding monetary policy.

Conflict, Inertia, and Phillips Curve from a Sraffian Standpoint

ABSTRACT The recent post-Keynesian debate on conflict inflation revolves around plausible magnitudes of the parameters of the standard model. We assess this debate by examining the economic meaning of the ‘bargaining’ and ‘indexation’ parameters, and proposing a reinterpretation in which the bargaining power is reflected in the relative frequency of wage and price increases in a period. Inflation then depends on the size of the inconsistent distributive claims and the absolute frequency of wage and price increases. Distribution depends on the relative frequency of such increases. From the latter we derive the real wage and profit resistance parameters, which determine the structural degree of inflation inertia. By adding the employment rate as a determinant of the desired real wage, we get a conflict-augmented Phillips curve. We show how different assumptions on the real resistance parameters affect the shape of the Phillips curve and the distributive outcomes in different conflict inflation models. A NAIRU occurs only when there is both full real wage and real profit resistance. Conflict generates inflation (not acceleration) with less extreme assumptions. The old-type conflict-augmented Phillips curve, with income distribution depending on the relative frequency of wage and price adjustments, is the most plausible case.

The effect of capacity constraints on the slope of the Phillips curve

Abstract How do capacity constraints affect the slope of the Phillips curve? In particular, do changes in output affect prices by more when firms face more strongly diminishing returns? Intuitively, one may conjecture that the answer is yes. With more strongly diminishing returns, marginal costs increase more when production increases, also raising prices by more. But this intuition is incomplete in models with sticky prices à la Calvo. In the standard New Keynesian model with Calvo pricing frictions, more strongly diminishing returns actually flatten the Phillips curve. The reason is the reluctance of firms who alter their prices to let their prices get too far out of line with the prices set by firms that do not adjust. We explain how the Phillips curve might be amended to avoid this implausible feature, for example, by using Rotemberg pricing or introducing wage stickiness.

AN EMPIRICAL TAKE ON THE “PLUCKING” MODEL

Traditional estimates of potential output based on the symmetric business cycle (boom–bust) view are prone to large retrospective revisions. The plucking view, which is supported by empirics, offers possible respite. Serious attempts to estimate the output ceiling in the plucking view, analogous to potential output in the traditional view, are scarce. This paper has three parts. The first estimates the output ceiling in a computationally simple approach. The second analyzes the relationship of the resultant output gap with inflation and with the unemployment rate. A comparison is made against output gap estimates based on prevailing methods. The third uses a vector autoregression (VAR) to analyze responses to supply and demand shocks. The paper finds that the plucking model offers three points of improvement over prevailing methods based on the boom–bust view. First, boom–bust estimates are prone to large retrospective revisions when two-sided filters are used, while the plucking estimates are not. Second, output gap estimates from both views do not correlate well with core inflation. This absence of evidence for a Phillips curve is problematic for the boom–bust view. The plucking estimates correlated well with the unemployment rate but the boom–bust estimates did not. Third, the output ceiling from the plucking model responded only to supply (oil price) shocks and not demand (interest rate) shocks, hence fits the description of a supply measure. This paper provides a template to estimate the output ceiling of the plucking model in other countries using publicly available macroeconomic data.

Factor IV Estimation in Conditional Moment Models with an Application to Inflation Dynamics

Abstract In a conditional moment model, we develop a new integrated conditional moment (ICM) estimator which directly exploits factor-based conditional moment restrictions without having to first parametrize, or estimate such restrictions. We focus on a time series framework where the large number of available instruments and associated lags is driven by a relatively small number of unobserved factors. We build on the ICM principle originally proposed by Bierens (1982) and combine it with information reduction methods to handle the large number of potential instruments which may exceed the sample size. Under the maintained validity of the true factors, but not that of observed instruments, and standard regularity assumptions, our estimator is consistent, asymptotically normally distributed, and easy to compute. In our simulation studies, we document its reliability and power in cases where the underlying relationship between the endogenous variables and the instruments may be heterogeneous, non-linear, or even unstable over time. Our estimation of the New Keynesian Phillips curve with U.S. data reveals that forward- and backward-looking behaviors are quantitatively equally as important, while the driver’s role is nil.

The unemployment–inflation trade-off revisited: The Phillips curve in COVID times

Using a New Keynesian Phillips curve, we document the rapid and persistent increase in the natural rate of unemployment, ut∗, in the aftermath of the pandemic and characterize its implications for inflation dynamics. While the bulk of the inflation surge is attributed to temporary supply factors, we also find an important role for current and expected negative unemployment gaps. Through the lens of the model, the 2022–2023 disinflation was driven by the expectation that the unemployment gap will close through a progressive decline in ut∗ and a rise in the unemployment rate. This implies that convergence to long-run price stability depends, critically, on expectations about labor market tightness. Using a variety of cross-sectional data sources we provide corroborating evidence of unusually tight labor market conditions, consistent with our estimated rise in ut∗.

The role of foreign reserves in inflation dynamics

Purpose – Central banks’ foreign reserve stocks in emerging markets have increased substantially in recent decades. Foreign reserves accumulation has been widely believed as a shock absorber to prevent financial crises. Meanwhile, accelerating foreign reserves might be contradictory to the monetary policy objectives. This research aims to investigate the impact of foreign reserves on the inflation dynamics.Method – We apply the inflation-expectation augmented Phillips curve on the monthly data over the period of 2005(7) to 2020(12) in the case of Indonesia. Findings – We show that stockpiling foreign exchange reserves indeed has an inflationary pressure impact. The central bank's intervention in the foreign exchange market is more significant in selling rather than purchasing foreign exchange. However, the non-monetary factors also play an important role in determining inflation. Implications – Considering channels through which foreign reserves might affect inflation, our findings suggest the monetary authority should be concerned with inflationary expectations in the short term as one of the major policy-driven goals to maintain price stability in the long run.Originality – This paper contributes to the literature on monetary policy in developing countries. Unlike other empirical studies, this research employs the inflation-expectation augmented Phillips curve and accommodates the issue of asymmetric effects of the change in foreign reserves.

Changes in the explanation of inflation

Most discussion of inflation in 2021-2022 have focused on product market shocks rather than unemployment indicators. The Phillips curve approach, which provides the traditional theoretical framework, was questioned. In addition to the surge in food and energy prices, many new inflationary factors have come to the fore, such as the disruption in supply chains, as well as fiscal spending and loose monetary policy in the context of the pandemic. These factors do not fit into the traditional approach. In this paper, we review the main literature on the US and European economies to see how the analytical framework represented by the Phillips curve can be adapted to analyse the current situation. Since its inception, the Phillips curve approach has undergone significant changes reflecting changes in the nature of inflation. For example, the unemployment gap was later replaced by the output gap. In the current situation, the output gap has been replaced by arguments in favour of the inclusion of enterprise pricing, marginal cost and the profit rate.

Revisiting the Phillips Curve: The Empirical Relationship Yet to be Validated*

AbstractThe Phillips curve began life in 1958 as a simple curve‐fitted relationship between the rates of wage inflation and unemployment and went on to play a crucial role in the broader development of macroeconomics, giving rise to several controversies about its interpretation and role in policy‐making. Recently, the traditional narrative about its theoretical underpinnings has been called into question as a sequence of ‘stories’ to provide support for particular theoretical perspectives on macroeconomics. The primary aim of this paper is to challenge the conventional wisdom relating to the Phillips curve being an attested empirical relationship, by showing that the empirical evidence of the most influential papers that helped to frame the traditional narrative is untrustworthy, in the sense that the probabilistic assumptions invoked by their inferences are invalid. That is, not only the traditional theory‐driven narrative is misleading, but the empirical evidence used to corroborate it is untrustworthy.

Teaching behavioral macroeconomics—Examples and applications

The author of this article provides an example of how one might incorporate behavioral economics into teaching macroeconomics or labor economics at an undergraduate level. The focus is on two macroeconomic concepts—wage determination and the Phillips curve—and shows that the implications and conclusions of both models differ from their textbook versions, once behavioral aspects are taken into account. In order to do that, the author first presents the standard macroeconomic model in both cases, then stresses situations where homo economicus, i.e., the rationality assumption, does not hold, and finally introduces behavioral economics concepts that explain noted differences. The explanations are intertwined with small classroom experiments that can be part of the lecture and used to make the lecture more interesting and comprehensible.

The Validity of the Phillips Curve in Türkiye: Empirical Findings Based on Multiple Structural Breaks

Bu çalışmada Türkiye'de kısa ve uzun vadede Phillips eğrisinin geçerliliğini, 1960 ile 2022 yılları arasındaki enflasyon ve işsizlik verilerini içeren bir veri seti ile çoklu yapısal kırılmaları dikkate alan Carrion-i-Silvestre vd. (2009) çoklu yapısal kırılmalı birim kök testi, Maki (2012) çoklu yapısal kırılmalı eşbütünleşme testi ve Newey-West HAC Tahmincisi kullanılarak incelenmektedir. Bu çalışma, değişkenler arasındaki ilişkinin sapmasız bir şekilde elde edilebilmesi için hem birim kök analizinde hem de eş bütünleşme analizinde yapısal kırılmaları dikkate alan az sayıdaki çalışma arasında yer alması, aynı zamanda diğer çalışmalardan farklı olarak 1960’ları kapsayacak şekilde en geniş ve en güncel veri setiyle değişkenler arasındaki ilişkiyi ampirik olarak incelemesi bakımından literatüre önemli bir katkı sağlamayı amaçlamaktadır. Bulgular, Türkiye'de uzun vadede Phillips Eğrisinin geçerli olmadığını, ancak kısa vadede önemli bir ters ilişki olduğunu (enflasyon ile işsizlik arasında trade-off) göstermektedir. Kısa dönem sonuçları işsizlik oranındaki 1 birimlik artışın TÜFE’yi 0,49 düşürdüğünü göstermektedir. Bu sonuçlar, Monetarist ve Yeni Keynesyen görüşlerle uyumlu olup, politika yapıcılar için önemli ipuçları sunmaktadır. Bu doğrultuda, çalışmada Yeni Keynesyen ve Monetarist ekollerinin savunduğu görüşler ekseninde politika yapıcılara bir dizi para ve maliye politikası önerileri sunulmaktadır.

Analysis of economic and mathematical models of monetary stimulation for the development of smart industry

Abstract The article considers economic and mathematical models in the context of monetary stimulation of financial and economic development of the smart industry. The article analyses AD-AS, DSGE, VAR, CAPM, RBC, Phillips Curve and Cobb-Douglas models. The advantages and disadvantages of the models in the context of monetary stimulation of smart industry development are identified. The analysis has revealed that all the considered models have certain disadvantages, such as complexity of use and lack of clarity in interpreting the results, as well as limited consideration of factors that are important in monetary stimulation of the smart industry. The reviewed VAR model is limited in taking into account all factors affecting economic variables and is sensitive to specification, which leads to significant changes in the final results depending on the included variables and their specification. The CAPM model is based on assumptions about market efficiency that do not always correspond to reality, while the RBC model is characterised by the absence of instability and unrealistic assumptions about market behaviour. The Phillips Curve model shows instability when inflation and unemployment respond to economic shocks in different ways, which is unacceptable in the context of monetary stimulation for the development of the smart industry. The analysis identified the advantages and disadvantages of all models, which allowed us to objectively assess the actual conditions of the models. The analysis has shown that, given the above shortcomings and the specifics of the current economic environment, the Cobb-Douglas model is the most effective for analysing and forecasting the development of the smart industry in Ukraine. The other models considered may also be useful for stimulating the development of the smart industry, but they do not provide the same flexibility and ease of use as the Cobb-Douglas model. Thus, given the specifics of monetary policy, the Cobb-Douglas model seems to be the most appropriate tool for analysing and forecasting monetary stimulus for the development of the smart industry in Ukraine. It allows for a wide range of production factors and is simple to analyse and interpret the final results, making it the most suitable for addressing complex issues of monetary stimulation in the context of smart industry development. Keywords monetary stimulation, smart industry, development, modeling

Expectation formation and the Phillips curve revisited

Abstract This paper studies expectation formation of professional forecasters in the context of the Phillips curve. We assess whether professionals form their expectations regarding inflation and unemployment consistent with the Phillips curve based on individual forecast data taken from the ECB Survey of Professional Forecasters. We consider expectations over different horizons and do not restrict the analysis to point forecasts but we also take the information inherent in density forecasts into account. We explicitly consider the role of anchoring of inflation expectations as potential source of nonlinearity, and we also assess whether the Phillips curve relation translates to a link between uncertainty regarding inflation and unemployment. Our findings show that professionals tend to build their expectations in line with the Phillips curve but this is only observed for expectations made for shorter horizons. For longer horizons, the Phillips curve connection is much weaker. This relationship also depends on the degree of anchoring and results in a connection between uncertainty regarding future inflation and unemployment.

Wage – price dynamics and financial market in a disequilibrium macro model: A Keynes – Kaldor – Minsky modeling of recession and inflation using VECM

This paper studies wage-price dynamics in the context of a disequilibrium macro model where there are two Phillips curves (PC's), a wage PC and price PC. We adapt this framework but introduce a Kaldorian delay effect in wage dynamics whereby output and sales predate wage dynamics. Along Keynesian lines aggregate demand drives output, but output is also impacted from the supply side, through Minsky - Kindleberger financial conditions, enhancing inflation through bottlenecks and supply constraints. Worsening financial conditions, resulting from central banks raising interest rates to counteract inflation, may actually accelerate the inflation rate through affecting the supply side. This occurs when there are financially generated bottlenecks and external non-stationary variables, such as fossil energy and food costs, acting as exogenous drivers of the inflation rate. These features are first studied in a disequilibrium intertemporal dynamic macroeconomic model but then empirically explored in a mixed Vector Error Correction Model (VECM) with a mix of stationary and non-stationary variables. Nonlinearities in the dynamics and regime switching are shown to be essential in disequilibrium macrodynamics, here first studied analytically and then econometrically, exploring the transitory and persistent effects of shocks.

Post‐COVID inflation dynamics: Higher for longer

AbstractWe implement a novel nonlinear structural model featuring an empirically successful frequency‐dependent and asymmetric Phillips curve; unemployment frequency components interact with three components of core personal consumption expenditures (PCE)—core goods, housing, and core services ex‐housing—and a variable capturing supply shocks. Forecast tests verify accuracy in its unemployment–inflation trade‐offs, crucial for monetary policy. Using this model, we assess the plausibility of the December 2022 Summary of Economic Projections (SEP). By 2025Q4, the SEP projects 2.1% inflation; however, conditional on the SEP unemployment path, we project 2.9%. A fairly deep recession delivers the SEP inflation path, but a simple welfare analysis rejects this outcome.

Stock returns and monetary policy stance

This paper investigates the structural relationships between monetary policy and stock returns. We build an asset pricing model incorporating a standard Taylor rule into a consumption-CAPM framework. Our model quantitatively explains the negative risk premium of expansionary monetary policy. As monetary policy plays a role of insurance, (expansionary) monetary policy beta is negatively related to covariances of returns with output gap and inflation theoretically and empirically. In addition, while systematic responses mainly account for the negative risk premium, pure monetary policy shocks have little influence under plausible calibrations. We also provide theoretical predictions on how the slope of the Phillips curve and the response parameters of monetary policy affect the cross-section of returns.

Влияние безработицы на уровень оплаты труда и прибыль

This work is devoted to an attempt to study the nature of the impact of unemployment on the level of wages and profits of enterprises. Based on Rosstat data on the unemployment rate, the average monthly nominal accrued wages of employees of organizations and the profitability of assets of industrial enterprises in the regions of the country, correlations of unemployment identified and linear regression models of these connections built. It been established that with a high level of unemployment, an increase in unemployment contributes to a decrease in wages; this influence is very small. At a low level of unemployment, starting from a level of less than 7–8%, the impact of unemployment on the level of wages begins to grow as the unemployment rate decreases until it reaches a value of 42–45% of the level of explanation of wages by the level of unemployment. This level of explanation observed at an unemployment rate of no more than 3–3.5%. If the unemployment rate does not exceed 3–3.5%, the degree of influence of unemployment on wages stabilizes and the decrease in unemployment determines the increase in wages by no more than 42–45%. Thus, the ideas about the wage curve and the Phillips curve are very simplified and do not reflect the complex nature of the influence of the unemployment level on wages. With a high level of unemployment, the growth of unemployment contributes to a decrease in the profitability of assets and, consequently, the profits of industrial enterprises. With an unemployment rate of no more than 4%, an increase in unemployment contributes to an increase in the profitability of assets and, consequently, the profits of industrial enterprises. Consequently, the idea that rising unemployment causes declining profits is overly simplistic and partly erroneous.

The wage curve after the Great Recession

AbstractMost economists maintain that the labour market in the USA (and elsewhere) is ‘tight’ because unemployment rates are low, and the Beveridge curve (the vacancies‐to‐unemployment ratio) is high. They infer from this that there is potential for wage‐push inflation. However, real wages fell rapidly in 2022, and prior to that, real wages had been stagnant for some time. We show that unemployment is not key to understanding wage formation in the USA, and has not been since the Great Recession. Instead, we show that rates of underemployment (the percentage of workers with part‐time hours who would prefer more hours) and the rate of inactivity (the percentage of the civilian adult population who are out of the labour force) reduce wage pressure in the USA. This finding holds in panel data with state and year fixed effects in both annual and quarterly data for the period 1980–2022, and is supportive of a wage curve that fits the data much better than a Phillips curve. The unemployment rate no longer enters significantly negative in wage equations, however specified, in the years since 2008.