Wren-Lewis, S. (2014) “Has the Great Recession killed the traditional Phillips Curve?“, Mainly Macro Blog, 14 Ιουλίου.
Before the New Classical revolution there was the Friedman/Phelps Phillips Curve (FPPC), which said that current inflation depended on some measure of the output/unemployment gap and the expected value of current inflation (with a unit coefficient). Expectations of inflation were modelled as some function of past inflation (e.g. adaptive expectations) – at its simplest just one lag in inflation. Therefore in practice inflation depended on lagged inflation and the output gap.
After the New Classical revolution came the New Keynesian Phillips Curve (NKPC), which had current inflation depending on some measure of the output/unemployment gap and the expected value of inflation in the next period. If this was combined with adaptive expectations, it would amount to much the same thing as the FPPC, but instead it was normally combined with rational expectations, where agents made their best guess at what inflation would be next period using all relevant information. This would include past inflation, but it would include other things as well, like prospects for output and any official inflation target.
Which better describes the data? The great attraction of the FPPC is that it can describe stagflation. We have a boom, which while it lasts steadily raises inflation. When the boom comes to an end, inflation stabilises, but at a much higher level than it began. So policy has to engineer a recession to get inflation back down again: a period in which above average unemployment is accompanied by above average inflation, which we call stagflation. If over this period we had had credible independent central banks setting inflation targets, the NKPC would not give us stagflation: when the boom came to an end, inflation would return to target. (For more explanation, see this post.) The trouble is we did not have inflation targeting during this period, so it is difficult to tell whether stagflation is evidence against the NKPC. (As an example of this ambiguity, see this survey of the empirical evidence by Nason and Smith. This enabled Robert Gordon to be quite supportive of the FPPC in 2009.)
Σχετικές αναρτήσεις:
- Ball, L. (2014) “The Great Recession’s long-term damage“, VoxEU Organisation, 01 Ιουλίου.
- Krusell, P. & Smith, T. (2014) “Is Piketty’s ‘Second Law of Capitalism’ fundamental?“, VoxEU Organisation, 01 Ιουνίου.
- Hatcher, N. & Minford, P. (2014) “Inflation targeting vs price-level targeting: A new survey of theory and empirics“, VoxEU Organisation, 11 Μαΐου.