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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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    File URL: https://piie.com/publications/policy-briefs/us-phillips-curve-back-60s
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    References listed on IDEAS

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    1. 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.
    2. Olivier Blanchard & Eugenio Cerutti & Lawrence Summers, 2015. "Inflation and Activity – Two Explorations and their Monetary Policy Implications," NBER Working Papers 21726, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Christophe Blot & Jérôme Creel & Paul Hubert, 2018. "Why does the revovery show so little inflation," Sciences Po publications info:hdl:2441/8m9642tnm9k, Sciences Po.
    2. Yasser Abdih & Ravi Balakrishnan & Baoping Shang, 2016. "What is Keeping U.S. Core Inflation Low; Insights from a Bottom-Up Approach," IMF Working Papers 16/124, International Monetary Fund.
    3. N. Gregory Mankiw & Ricardo Reis, 2018. "Friedman's Presidential Address in the Evolution of Macroeconomic Thought," Journal of Economic Perspectives, American Economic Association, vol. 32(1), pages 81-96, Winter.
    4. Mario Cimoli & Jose Antonio Ocampo & Gabriel Porcile, 2017. "Choosing sides in the trilemma: international financial cycles and structural change in developing economies," LEM Papers Series 2017/26, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    5. Yellen, Janet L., 2016. "Macroeconomic Research After the Crisis : a speech at "The Elusive 'Great' Recovery: Causes and Implications for Future Business Cycle Dynamics" 60th annual economic conference sponsored by ," Speech 915, Board of Governors of the Federal Reserve System (U.S.).
    6. David L. Reifschneider, 2016. "Gauging the Ability of the FOMC to Respond to Future Recessions," Finance and Economics Discussion Series 2016-068, Board of Governors of the Federal Reserve System (U.S.).
    7. Thórarinn G. Pétursson, 2018. "Disinflation and improved anchoring of long-term inflation expectations - The Icelandic experience," Economics wp77, Department of Economics, Central bank of Iceland.
    8. Stefan Laseen & Marzie Taheri Sanjani, 2016. "Did the Global Financial Crisis Break the U.S. Phillips Curve?," IMF Working Papers 16/126, International Monetary Fund.
    9. Ryan Niladri Banerjee & Aaron Mehrotra, 2018. "Deflation expectations," BIS Working Papers 699, Bank for International Settlements.
    10. Guillaume Gaulier & Vincent Vicard, 2018. "Some Unpleasant Euro Arithmetic," CEPII Policy Brief 2018-21, CEPII research center.
    11. repec:fip:fedlrv:00099 is not listed on IDEAS
    12. Francesca Rondina, 2017. "Model Uncertainty and the Direction of Fit of the Postwar U.S. Phillips Curve(s)," Working Papers 1702E, University of Ottawa, Department of Economics.
    13. Esposito, Piero & Messori, Marcello, 2016. "Improved Structural Competitiveness or Deep Recession? On the recent macroeconomic rebalances in the EMU," SEP Working Papers 2016/3, LUISS School of European Political Economy.
    14. repec:spr:izalpo:v:6:y:2017:i:1:d:10.1186_s40173-017-0087-z is not listed on IDEAS
    15. Schmelzing, Paul, 2017. "Staff Working Paper No. 686: Eight centuries of the risk-free rate: bond market reversals from the Venetians to the ‘VaR shock’," Bank of England working papers 686, Bank of England.
    16. Cecchetti, Stephen G & Feroli, Michael & Hooper, Peter & Kashyap, Anil K & Schoenholtz, Kermit, 2017. "Deflating Inflation Expectations: The Implications of Inflation's Simple Dynamics," CEPR Discussion Papers 11925, C.E.P.R. Discussion Papers.
    17. Guido Bulligan & Eliana Viviano, 2017. "Has the wage Phillips curve changed in the euro area?," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 6(1), pages 1-22, December.
    18. Cimoli, Mario & Porcile, Gabriel, 2017. "Micro-macro interactions, growth and income distribution revisited," Desarrollo Productivo 212, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    19. Jeremy J. Nalewaik, 2016. "Inflation Expectations and the Stabilization of Inflation : Alternative Hypotheses," Finance and Economics Discussion Series 2016-035, Board of Governors of the Federal Reserve System (U.S.).

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