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The US Inflation-Unemployment Tradeoff: Methodological Issues and Further Evidence

  • Karanassou, Marika

    ()

    (Queen Mary, University of London)

  • Sala, Hector

    ()

    (Universitat Autònoma de Barcelona)

This paper addresses the various methodological issues surrounding vector autoregressions, simultaneous equations, and chain reactions, and provides new evidence on the long-run inflation-unemployment tradeoff in the US. It is argued that money growth is a superior indicator of the monetary environment than the federal funds rate and, thus, the focus is on the inflation/unemployment responses to money growth shocks. SVAR (structural vector autoregression) and GMM (generalised method of moments) estimations confirm earlier findings in Karanassou, Sala and Snower (2005, 2008b) obtained from chain reaction structural models: the slope of the US Phillips curve is far from vertical, even in the long-run, which implies that the nominal and real sides of the economy are symbiotic. In the light of the significant and robust long-run inflation-unemployment tradeoffs, policy makers should reconsider the classical dichotomy thesis.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 4252.

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Length: 26 pages
Date of creation: Jun 2009
Date of revision:
Publication status: published as 'The US Inflation-Unemployment Trade-off Revisited: New Evidence for Policy Making' in: Journal of Policy Modeling, 2010, 32 (6), 758-777
Handle: RePEc:iza:izadps:dp4252
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