The Phillips curve is unstable and, therefore, an imperfect guide for policy.
But unstable does not mean nonexistent, and imperfect does not mean useless. As long as the tools of monetary policy influence both inflation and unemployment, monetary policymakers must be cognizant of the trade-off.
Mr. Powell was smart to acknowledge during his congressional hearing that the Fed’s track record is flawed. But the uncertainty inherent in monetary policymaking does not mean that “the single most important macroeconomic relationship” can now be ignored.
The Fed’s job is to balance the competing risks of rising unemployment and rising inflation. Striking just the right balance is never easy. The first step, however, is to recognize that the Phillips curve is always out there lurking.
Chosen excerpts by Job Market Monitor. Read the whole story at Yes, There Is a Trade-Off Between Inflation and Unemployment – The New York Times
This paper studies the current state of inflation dynamics through the lens of the Phillips curve and assesses the degree of anchoring of inflation expectations. I first estimate a Phillips curve model with both past inflation and a constant anchor as explanatory variables over the 1999– 2018 period for a variety of measures of consumer … Continue reading
I’m thinking about the rest of us, starting at the top—with the Fed—who are struggling to figure out the nature of the tradeoff as the Fed begins to contemplate unwinding. Given Chair Yellen’s (very appropriate) focus on job-market slack and thus her up-weighting of the full employment side of the mandate, there’s clearly some anxiety … Continue reading
Though the U.S. economy is apparently at or close to full employment, wages have barely budged above the level that would be justified by productivity increases and inflation alone. There is little or no inflationary pressure. The so-called Phillips curve that once mapped the inverse relationship between unemployment and inflation is not serving as a … Continue reading
The unemployment rate ended 2018 at just under 4%, substantially lower than most estimates of the natural rate. Could such an ostensibly tight labor market lead to a sharp pickup in wage growth from its recent moderate pace, such that the relationship between wage growth and unemployment is not always linear? Investigations using state-level data … Continue reading