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The US Phillips Curve: Back to the 60s?

Listed author(s):
  • Olivier J. Blanchard

    ()

    (Peterson Institute for International Economics)

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.

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File URL: https://piie.com/publications/policy-briefs/us-phillips-curve-back-60s
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Paper provided by Peterson Institute for International Economics in its series Policy Briefs with number PB16-1.

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Date of creation: Jan 2016
Handle: RePEc:iie:pbrief:pb16-1
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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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