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The Evolution of the U.S. Output-Inflation Tradeoff

  • Benjamin Wong

This paper proposes quantifying the evolution of the U.S. output-inflation tradeoff using a Time-Varying Parameter Structural VAR. This methodology circumvents issues with existing methods which tend to be either reduced form in nature or rely on more ad hoc assumptions regarding sample split dates and both trend output and trend inflation. Working through U.S. data since the 1970s reveals only a slight change in the tradeoff from around 1.70 to 1.75 percentage points of real output growth per percentage point increase in trend inflation. This contrasts with claims that the U.S. Phillips Curve has flattened dramatically.

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File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2013-10/70_wong.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-70.

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Length: 29 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:een:camaaa:2013-70
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  1. Jordi Gali & Luca Gambetti, 2008. "On the Sources of the Great Moderation," NBER Working Papers 14171, National Bureau of Economic Research, Inc.
  2. Sangjoon Kim & Neil Shephard, 1994. "Stochastic volatility: likelihood inference and comparison with ARCH models," Economics Papers 3., Economics Group, Nuffield College, University of Oxford.
  3. Smets, Frank & Wouters, Rafael, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 6112, C.E.P.R. Discussion Papers.
  4. Gary Koop & Roberto Leon-Gonzalez & Rodney W. Strachan, 2008. "Dynamic probabilities of restrictions in state space models: An application to the Phillips curve," Working Paper Series 26-08, The Rimini Centre for Economic Analysis, revised Jan 2008.
  5. Ken Kuttner & Tim Robinson, 2008. "Understanding the Flattening Phillips Curve," Department of Economics Working Papers 2008-15, Department of Economics, Williams College.
  6. Timothy Cogley & Thomas Sargent, . "Drifts and Volatilities: Monetary Policies and Outcomes in the Post WWII US," Working Papers 2133503, Department of Economics, W. P. Carey School of Business, Arizona State University.
  7. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  8. Sandeep Mazumder & Laurence M. Ball, 2011. "Inflation Dynamics and the Great Recession," IMF Working Papers 11/121, International Monetary Fund.
  9. Luca Benati, 2007. "The Time-Varying Phillips Correlation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(5), pages 1275-1283, 08.
  10. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense? A Reply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 943-48, November.
  11. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-31, November.
  12. Koop, Gary & Potter, Simon M., 2011. "Time varying VARs with inequality restrictions," Journal of Economic Dynamics and Control, Elsevier, vol. 35(7), pages 1126-1138, July.
  13. Mazumder, Sandeep, 2014. "Determinants of the sacrifice ratio: Evidence from OECD and non-OECD countries," Economic Modelling, Elsevier, vol. 40(C), pages 117-135.
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