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An Anatomy of the Phillips Curve

  • Marika Karanassou

    ()

    (Queen Mary, University of London)

  • Dennis J. Snower

    (Birkbeck College)

The paper examines how the long-run inflation-unemployment tradeoff depends on the degree to which wage-price decisions are backward- versus forward-looking. When economic agents, facing time-contingent, staggered nominal contracts, have a positive rate of time preference, the current wage and price levels depend more heavily on past variables (e.g. past wages and prices) than on future variables. Consequently, the long-run Phillips curve becomes downward-sloping and, indeed, quite flat for plausible parameter values. This paper provides an intuitive account of how this long-run Phillips curve arises.

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File URL: http://www.econ.qmul.ac.uk/papers/doc/wp478.pdf
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Paper provided by Queen Mary University of London, School of Economics and Finance in its series Working Papers with number 478.

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Date of creation: Dec 2002
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Handle: RePEc:qmw:qmwecw:wp478
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  1. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Wiley Blackwell, vol. 49(4), pages 517-31, October.
  2. Ascari, Guido & Rankin, Neil, 2002. "Staggered wages and output dynamics under disinflation," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 653-680, April.
  3. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  4. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  5. Ascari, G., 1997. "Optimizing Agents, Staggered Wages and Persistence in the Real Effects of Money Shocks," The Warwick Economics Research Paper Series (TWERPS) 486, University of Warwick, Department of Economics.
  6. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  7. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  8. Graham, Liam & Snower, Dennis J., 2003. "The Return of the Long-Run Phillips Curve," CEPR Discussion Papers 3691, C.E.P.R. Discussion Papers.
  9. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  10. N. Gregory Mankiw, 2000. "The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment," Harvard Institute of Economic Research Working Papers 1905, Harvard - Institute of Economic Research.
  11. Huang, Kevin X. D. & Liu, Zheng, 2002. "Staggered price-setting, staggered wage-setting, and business cycle persistence," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 405-433, March.
  12. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
  13. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
  14. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  15. Galí, Jordi, 2002. "New Perspectives on Monetary Policy, Inflation and the Business Cycle," CEPR Discussion Papers 3210, C.E.P.R. Discussion Papers.
  16. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
  17. Taylor, John B., 1980. "Output and price stability: An international comparison," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 109-132, May.
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