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The US Phillips Curve: Back to the 60s?

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  • Olivier J. Blanchard

    (Peterson Institute for International Economics)

Abstract

Blanchard reexamines the behavior of inflation and unemployment and reaches four conclusions: (1) Low unemployment still pushes inflation up; high unemployment pushes it down. Put another way, the US Phillips curve is alive. (2) Inflation expectations, however, have become steadily more anchored, leading to a relation between the unemployment rate and the level of inflation rather than the change in inflation. In this sense, the relation resembles more the Phillips curve of the 1960s than the accelerationist Phillips curve of the later period. (3) The slope of the Phillips curve, i.e., the effect of the unemployment rate on inflation given expected inflation, has substantially declined. But the decline dates back to the 1980s rather than to the crisis. There is no evidence of a further decline during the crisis. (4) The standard error of the residual in the relation is large, especially in comparison to the low level of inflation. Each of the last three conclusions presents challenges for the conduct of monetary policy. Wisdom gained from the experience of the 1960s and later will be needed.

Suggested Citation

  • Olivier J. Blanchard, 2016. "The US Phillips Curve: Back to the 60s?," Policy Briefs PB16-1, Peterson Institute for International Economics.
    • Handle: RePEc:iie:pbrief:pb16-1
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    References listed on IDEAS

    as
    1. Michael T. Kiley, 2015. "Low Inflation in the United States : A Summary of Recent Research," FEDS Notes 2015-11-23, Board of Governors of the Federal Reserve System (U.S.).
    2. Laurence Ball & Sandeep Mazumder, 2011. "Inflation Dynamics and the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 337-405.
    3. Blanchard, Oliver & Cerutti, Eugenio & SUmmers, Lawrence, 2015. "Inflation and Activity - Two Explorations and Their Monetary Policy Implications," Working Paper Series 15-070, Harvard University, John F. Kennedy School of Government.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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