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Flattening of the Phillips Curve

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  • Dora M. Iakova
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    Abstract

    Over the past decade, inflation has become less responsive to domestic demand pressures in many industrial countries. This development has been attributed, in part, to globalization forces. A small macroeconomic model, estimated on UK data using Bayesian estimation, is used to analyze the monetary policy implications of this structural change. The focus is on the implications of a globalization-related flattening of the Phillips curve for the trade-off between inflation and output gap variability and for the efficient monetary policy response rule.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/76.

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    Length: 19
    Date of creation: 01 Apr 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/76

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    Keywords: Production; Economic models; inflation; monetary policy; real interest rate; monetary policy rules; inflation targeting; aggregate demand; central bank; monetary policy reaction function; rational expectations; monetary policy implications; rate of inflation; monetary fund; price inflation; monetary economics; nominal interest rate; inflation target; inflation deviation; optimal ? monetary policy; real exchange rates; coefficient on inflation; monetary authority; low inflation; inflation equation; inflation rates; monetary policy regimes; monetary model; optimal monetary policy;

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    1. Monacelli, Tommaso, 2004. "Into the Mussa puzzle: monetary policy regimes and the real exchange rate in a small open economy," Journal of International Economics, Elsevier, Elsevier, vol. 62(1), pages 191-217, January.
    2. Ball, Laurence, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 2(1), pages 63-83, April.
    3. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of simple monetary policy rules under model uncertainty," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-45, Board of Governors of the Federal Reserve System (U.S.).
    4. Robert J. Tetlow & Peter von zur Muehlen, 1999. "Simplicity versus optimality the choice of monetary policy rules when agents must learn," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1999-10, Board of Governors of the Federal Reserve System (U.S.).
    5. Frank Smets, 2002. "Output gap uncertainty: Does it matter for the Taylor rule?," Empirical Economics, Springer, Springer, vol. 27(1), pages 113-129.
    6. Ashoka Mody & Franziska Ohnsorge, 2007. "Can Domestic Policies Influence Inflation?," IMF Working Papers 07/257, International Monetary Fund.
    7. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(1), pages 81-97, June.
    8. Ann-Charlotte Eliasson & Peter Isard & Douglas Laxton, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," IMF Working Papers 99/75, International Monetary Fund.
    9. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(4), pages 975-84, November.
    10. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
    11. Papa M'B. P. N'Diaye & Douglas Laxton, 2002. "Monetary Policy Credibility and the Unemployment-Inflation Tradeoff," IMF Working Papers 02/220, International Monetary Fund.
    12. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 47(5), pages 1267-86, September.
    13. Donald L. Kohn, 2006. "The effects of globalization on inflation and their implications for monetary policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, vol. 51.
    14. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
    15. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
    16. Laurence Boone & Michel Juillard & Doug Laxton & Papa N'Diaye, 2002. "How Well Do Alternative Time-Varying Parameter Models of the NAIRU Help Policymakers Forecast Unemployment and Inflation in the OECD Countries?," Computing in Economics and Finance 2002, Society for Computational Economics 359, Society for Computational Economics.
    17. Laurence M. Ball, 2006. "Has Globalization Changed Inflation?," NBER Working Papers 12687, National Bureau of Economic Research, Inc.
    18. Douglas Laxton & Andrew Berg & Philippe D Karam, 2006. "A Practical Model-Based Approach to Monetary Policy Analysis: Overview," IMF Working Papers 06/80, International Monetary Fund.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Faut-il revoir le mandat des banques centrales ?
      by ? in D'un champ l'autre on 2014-05-31 23:55:00
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    Cited by:
    1. Forges Davanzati, Guglielmo & Pacella, Andrea, 2013. "The profits-investments puzzle: A Post Keynesian-Institutional interpretation," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 26(C), pages 1-13.
    2. Troy Davig, 2007. "Phillips curve instability and optimal monetary policy," Research Working Paper, Federal Reserve Bank of Kansas City RWP 07-04, Federal Reserve Bank of Kansas City.

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