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The Phillips Curve Now and Then

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Robert J. Gordon

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Abstract

This paper describes the development of the "triangle" model of inflation, which holds that the rate of inflation depends on inertia, demand. and supply. This model differs from most other versions of the Phillips curve by relating inflation directly to the level and rate of change of detrended real output, and by excluding wages, the unemployment rate, and any mention of "expectations." The model identifies the ultimate source of inflation as nominal GNP growth in excess of potential real output growth and implies that a policy rule that targets excess nominal GNP growth is an essential precondition to avoiding an acceleration of inflation, Any residual instability of inflation then depends on the severity of supply shocks. The textbook and econometric versions of the triangle model were developed simultaneously in the mid-1970s. Since then there have been two empirical validations for the U. S. of the model as estimated a decade ago. First, the "sacrifice" ratio of cumulative output loss relative to the decline in inflation during the business slump of the early 1980s was predicted accurately in advance. Second, the natural unemployment rate implied by the model's estimates predicted in advance the slow acceleration of inflation that occurred in began in 1987, when the unemployment rate fell below 6 percent.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3393.

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Date of creation: Aug 1991
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Handle: RePEc:nbr:nberwo:3393

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References listed on IDEAS
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  1. Robert E. Lucas, Jr. & Thomas J. Sargent, 1979. "After Keynesian macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr. [Downloadable!]
  2. Matthew D. Shapiro, 1989. "Assessing the Federal Reserve's Measures of Capacity and Utilization," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1989-1), pages 181-242. [Downloadable!]
  3. George L. Perry, 1970. "Changing Labor Markets and Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(1970-3), pages 411-448. [Downloadable!]
  4. Robert J. Gordon & Stephen R. King, 1982. "The Output Cost of Disinflation in Traditional and Vector Autoregressive Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1982-1), pages 205-244. [Downloadable!]
  5. Robert J. Gordon, 1976. "The Theory of Domestic Inflation," Discussion Papers 250, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  6. Robert J. Barro, 1989. "New Classicals and Keynesians, or the Good Guys and the Bad Guys," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 125(III), pages 263-273, September. [Downloadable!]
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  7. Olivier J. Blanchard, 1987. "Why Does Money Affect Output? A Survey," Working papers 453, Massachusetts Institute of Technology (MIT), Department of Economics.
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