Inside and outside bounds: threshold estimates of the Phillips curve
AbstractOver the past 30 years, debates about the usefulness of the Phillips curve for explaining inflation have been ongoing. One of the reasons for the recurring debate about the existence of an inflation and unemployment tradeoff is that there have been several instances when large movements in the unemployment rate have elicited little response in the inflation rate. In principle, these episodes of horizontal movement are consistent with a Phillips curve relationship; they just require the curve to shift in the same direction as the unemployment rate. Econometric representations of the Phillips relationship usually incorporate factors that can cause the Phillips curve to shift over time. However, the literature has not yet provided a test of whether such factors are sufficient to explain the episodes of horizontal movement. ; In this paper, the authors test the explanatory power of a piecewise linear specification of the Phillips relationship against a simple linear specification. The authors find that a piecewise linear specification of the Phillips curve provides a good characterization of inflation dynamics over the past 40 years and that the traditional shifters in the relationships are insufficient to characterize the episodes of horizontal movement. Apparently, the gap between the unemployment rate and the natural rate of unemployment must be outside of some threshold values before triggering a response in inflation. This suggests that monetary policy should aim to drive the unemployment rate lower until the lower limit of the inflation range is reached; however, such a strategy is complicated by the fact that the lower unemployment limit is estimated with uncertainty, leaving the policy implications open to debate.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Federal Reserve Bank of Boston in its journal New England Economic Review.
Volume (Year): (2003)
Issue (Month): ()
Other versions of this item:
- Giovanni P. Olivei & Michelle L. Barnes, 2004. "Inside and Outside Bounds: Threshold Estimates of the Phillips Curve," Econometric Society 2004 Australasian Meetings 295, Econometric Society.
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Geoffrey M.B. Tootell, 1994. "Restructuring, the NAIRU, and the Phillips curve," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 31-44.
- Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56.
- Hansen, B.E., 1991.
"Inference when a Nuisance Parameter is Not Identified Under the Null Hypothesis,"
RCER Working Papers
296, University of Rochester - Center for Economic Research (RCER).
- Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March.
- Woglom, Geoffrey, 1982. "Underemployment Equilibrium with Rational Expectations," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 89-107, February.
- Robert E. Hall, 2003. "Wage Determination and Employment Fluctuations," NBER Working Papers 9967, National Bureau of Economic Research, Inc.
- Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
- Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
- Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, January.
- Richard Peach & Robert Rich & Anna Cororaton, 2011. "How does slack influence inflation?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 17(June).
- Eva M. Köberl, 2011. "Kapazitätsauslastung, Produktionshemmnisse und Preisanpassungen unter dem Mikroskop," KOF Analysen, KOF Swiss Economic Institute, ETH Zurich, vol. 5(4), pages 43-54, December.
- James H. Stock & Mark W. Watson, 2010. "Modeling Inflation After the Crisis," NBER Working Papers 16488, National Bureau of Economic Research, Inc.
- Alberto Musso & Livio Stracca & Dick van Dijk, 2009.
"Instability and Nonlinearity in the Euro-Area Phillips Curve,"
International Journal of Central Banking,
International Journal of Central Banking, vol. 5(2), pages 181-212, June.
- Musso, Alberto & Stracca, Livio & van Dijk, Dick, 2007. "Instability and nonlinearity in the euro area Phillips curve," Working Paper Series 0811, European Central Bank.
- Jenny Lye & Ian McDonald, 2008. "The Eisner Puzzle, the Unemployment Threshold and the Range of Equilibria," International Advances in Economic Research, Springer, vol. 14(2), pages 125-141, May.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio).
If references are entirely missing, you can add them using this form.