IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Inside and outside bounds: threshold estimates of the Phillips curve

  • Michelle L. Barnes
  • Giovanni P. Olivei

Over 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.

If 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.

File URL: http://www.bostonfed.org/economic/neer/neer2003/neer03a.htm
Download Restriction: no

File URL: http://www.bostonfed.org/economic/neer/neer2003/neer03a.pdf
Download Restriction: no

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (2003)
Issue (Month): ()
Pages: 3-18

as
in new window

Handle: RePEc:fip:fedbne:y:2003:p:3-18
Contact details of provider: Postal: 600 Atlantic Avenue, Boston, Massachusetts 02210
Phone: 617-973-3397
Fax: 617-973-4221
Web page: http://www.bos.frb.org/
Email:


More information through EDIRC

Order Information: Email:


References listed on IDEAS
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.:

as in new window
  1. 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.
  2. 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.
  3. Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
  4. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, June.
  5. Robert E. Hall, 2003. "Wage Determination and Employment Fluctuations," NBER Working Papers 9967, National Bureau of Economic Research, Inc.
  6. Woglom, Geoffrey, 1982. "Underemployment Equilibrium with Rational Expectations," The Quarterly Journal of Economics, MIT Press, vol. 97(1), pages 89-107, February.
  7. 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.
  8. 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.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedbne:y:2003:p:3-18. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.