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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. 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.
  2. Ken Kuttner & Tim Robinson, 2008. "Understanding the Flattening Phillips Curve," RBA Research Discussion Papers rdp2008-05, Reserve Bank of Australia.
  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. Mazumder, Sandeep, 2012. "Determinants of the Sacrifice Ratio: Evidence from OECD and non-OECD countries," Working Papers 106, Wake Forest University, Economics Department.
  5. 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.
  6. Koop, Gary & Leon-Gonzalez, Roberto & Strachan, Rodney W., 2010. "Dynamic Probabilities of Restrictions in State Space Models: An Application to the Phillips Curve," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(3), pages 370-379.
  7. Luca Gambetti & Jordi Galí, 2009. "On the Sources of the Great Moderation," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 26-57, January.
  8. Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco.
  9. Timothy Cogley & Thomas J. Sargent, 2003. "Drifts and volatilities: monetary policies and outcomes in the post WWII U.S," FRB Atlanta Working Paper 2003-25, Federal Reserve Bank of Atlanta.
  10. Laurence M. Ball & Sandeep Mazumder, 2011. "Inflation Dynamics and the Great Recession," NBER Working Papers 17044, National Bureau of Economic Research, Inc.
  11. Luca Benati, 2007. "The Time-Varying Phillips Correlation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(5), pages 1275-1283, 08.
  12. 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.
  13. Sangjoon Kim & Neil Shephard & Siddhartha Chib, 1998. "Stochastic Volatility: Likelihood Inference and Comparison with ARCH Models," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 361-393.
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