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Exploitability as a Specification Test of the Phillips Curve

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  • Minford, Patrick
  • Peel, David

Abstract

Nominal price and wage rigidity renders monetary policy effective over output. However, this effectiveness extends, under widely used overlapping-wage and Calvo-contract Phillips Curves, to planned monetary policy (?exploitability?) and not merely to policy surprises. We argue that within both frameworks, when agents write optimal nominal contracts, they will not be exploitable by planned monetary policy. We therefore suggest non-exploitability as a specification test for Phillips Curves.

Suggested Citation

  • Minford, Patrick & Peel, David, 2002. "Exploitability as a Specification Test of the Phillips Curve," CEPR Discussion Papers 3612, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3612
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    References listed on IDEAS

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    1. Coenen, Gunter & Wieland, Volker, 2005. "A small estimated euro area model with rational expectations and nominal rigidities," European Economic Review, Elsevier, vol. 49(5), pages 1081-1104, July.
    2. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    4. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
    5. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-254, April.
    6. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-190, February.
    7. Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Real Wages, Employment, and Inflation," Journal of Political Economy, University of Chicago Press, vol. 77(5), pages 721-754, Sept./Oct.
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    Citations

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    Cited by:

    1. Minford, Patrick & Peel, David, 2004. "Calvo Contracts: A Critique," CEPR Discussion Papers 4288, C.E.P.R. Discussion Papers.
    2. Minford, Patrick & Le, Vo Phuong Mai, 2007. "Optimising Indexation Arrangements under Calvo Contracts and their Implications for Monetary Policy," CEPR Discussion Papers 6325, C.E.P.R. Discussion Papers.
    3. Hasan Bakhshi & Pablo Burriel-Llombart & Hashmat Khan & Barbara Rudolf, 2003. "Endogenous price stickiness, trend inflation, and the New Keynesian Phillips curve," Bank of England working papers 191, Bank of England.
    4. Bakhshi, Hasan & Khan, Hashmat & Burriel-Llombart, Pablo & Rudolf, Barbara, 2007. "The New Keynesian Phillips curve under trend inflation and strategic complementarity," Journal of Macroeconomics, Elsevier, vol. 29(1), pages 37-59, March.

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    More about this item

    Keywords

    Phillips curve; Calvo contract; Overlapping wages;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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