(1) is strongly exogenous and stationary then our prior empirical belief concerning the estimated values of δ f, δ b and δ f + δ b depends on what we believe is the ‘true’ statistical process of inflation. The ‘breakdown’ was due to changes in the expected rate of inflation associated with changes in the long-run rate of inflation and therefore concomitant with inflation being non-stationary.Ĭonsider now the estimation of Phillips curves with the last 50 years of United States inflation data. 6 Indeed, a large measure of Friedman’s success in establishing the existence of the vertical long-run Phillips curve was in predicting the ‘breakdown’ of the original Phillips curve identified by Phillips (1958). The vertical long-run Phillips curve is a central tenant of ‘modern’ Phillips curve theories of inflation since Friedman (1968) and Phelps (1967) and implies that inflation may be non-stationary around multiple long-run rates of inflation. We return to provide an explanation of the ‘overwhelmingly consistent’ empirical results in the conclusion. Similarly, in the F–P literature the sum of the lagged inflation terms is also insignificantly different from 1. This is interpreted as forward looking agents dominating backward looking agents in the price setting process. In the NK and hybrid literatures δ f and δ f + δ b are insignificantly different from 1 respectively with a larger weighting on the forward-looking term in the hybrid model. The standard empirical literature overwhelmingly provides estimates consistent with the predicted values in the modern theories of the Phillips curve. 4 For the long-run Phillips curve to be vertical requires δ f + δ b = 1 in all three models of inflation. Finally, the more general hybrid model of Gali and Gertler (1999) and Gali et al., 2001 assumes that there are both backward and forward-looking price setting agents and that δ f + δ b = 1. In the purely forward-looking rational expectations New Keynesian (NK) Phillips Curve models of Clarida et al. In the purely backward looking Friedman (1968) and Phelps (1967) (F–P) expectations augmented Phillips curve model, agents hold adaptive expectations implying that δ f = 0 and δ b = 1. At low to moderate rates of inflation it is shown that the long-run Phillips curve has a significant, small but most likely economically important positive slope.Ī straightforward taxonomy of modern Phillips curve theories can be thought of in terms of restrictions to the reduced form hybrid Phillips curve where inflation, Δ p t, depends on expected inflation, E t ( Δ p t + 1 ) conditioned on information available at time t, lagged inflation, Δ p t −1, and a ‘forcing’ variable, x t, and written 3: Δ p t = δ f E t ( Δ p t + 1 ) + δ b Δ p t - 1 + δ x x t + ε twhere the error term, ɛ t, is due to the random errors of agents and the shocks to inflation. 2 It is also found that the important prediction of the ‘modern’ theories that the long-run Phillips curve is ‘vertical’ is only approximately true. This empirical methodology suggests all three ‘modern’ theories are not supported by the data.
PHILLIPS CURVE ON EVIEWS 10 SERIES
Finally we proceed to estimate Phillips curves for the United States using a time series panel data approach that is congruent with our understanding of the statistical process of inflation. Furthermore, given this understanding we should logically expect the standard empirical approaches to produce severely biased estimates. 1 First, we demonstrate that the empirical methodology employed in the standard literature to examine modern theories of the Phillips curve is invalid in that it is inconsistent with our understanding of the statistical process of inflation. While it is difficult to examine Phillips curve theories directly, the theories make very strong predictions concerning the statistical properties of inflation and it is these predictions that we will examine empirically.
0 kommentar(er)
