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Is the Phillips Curve a Curve? Some Evidence and Implications for Australia

  • Guy Debelle

    (Reserve Bank of Australia)

  • James Vickery

    (Reserve Bank of Australia)

The Phillips curve has generally been estimated in a linear framework. This paper investigates the possibility that the Phillips curve is indeed a curve, and shows that a convex short-run Phillips curve may be a more accurate representation of reality than the traditionally used linear specification. The paper also discusses the policy implications of convexity in the Phillips curve. These include the need for policy to be forward-looking and to act pre-emptively. Convexity provides a strong rationale for stabilisation policy, and it reinforces the need for policy-makers to proceed cautiously. It also implies that deep recessions may have only a marginally greater disinflationary impact than shallower ones, unless they induce large credibility bonuses.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9706.

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Date of creation: Oct 1997
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Handle: RePEc:rba:rbardp:rdp9706
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  1. 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.
  2. Kenneth Kuttner, 1992. "Monetary policy with uncertain estimates of potential output," Economic Perspectives, Federal Reserve Bank of Chicago, issue Jan, pages 2-15.
  3. Laurence Ball, 1993. "What Determines the Sacrifice Ratio?," NBER Working Papers 4306, National Bureau of Economic Research, Inc.
  4. Douglas Laxton & Guy Debelle, 1996. "Is the Phillips Curve Really a Curve? Some Evidence for Canada, the United Kingdom, and the United States," IMF Working Papers 96/111, International Monetary Fund.
  5. Michael Parkin, 1973. "The Short Run and Long Run Trade-offs between Inflation and Unemployment in Australia," RBA Research Discussion Papers rdp31, Reserve Bank of Australia.
  6. Marco A. Espinosa-Vega & Steven Russell, 1997. "History and theory of the NAIRU: a critical review," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 4-25.
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  8. John M. Roberts, 1994. "Is inflation sticky?," Working Paper Series / Economic Activity Section 152, Board of Governors of the Federal Reserve System (U.S.).
  9. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, March.
  10. Mark Crosby & Nilss Olekalns, 1998. "Inflation, Unemployment and the NAIRU in Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 31(2), pages 117-129.
  11. Erica L. Groshen & Mark E. Schweitzer, 1997. "Identifying inflations grease and sand effects in the labor market," Working Paper 9705, Federal Reserve Bank of Cleveland.
  12. Peter B. Clark & Douglas Laxton & David Rose, 1995. "Capacity Constraints, Inflation and the Transmission Mechanism; Forward-Looking Versus Myopic Policy Rules," IMF Working Papers 95/75, International Monetary Fund.
  13. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
  14. Geoffrey M.B. Tootell, 1994. "Restructuring, the NAIRU, and the Phillips curve," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 31-44.
  15. Robert Ford & Douglas Laxton, 1995. "World Public Debt and Real Interest Rates," IMF Working Papers 95/30, International Monetary Fund.
  16. Douglas Laxton & Peter B. Clark, 1997. "Phillips Curves, Phillips Lines and the Unemplyment Costs of Overheating," IMF Working Papers 97/17, International Monetary Fund.
  17. Mitchell, William F, 1987. "The Nairu, Structural Imbalance and the Macroequilibrium Unemployment Rate," Australian Economic Papers, Wiley Blackwell, vol. 26(48), pages 101-18, June.
  18. Robert J. Gordon, 1970. "The Recent Acceleration of Inflation and Its Lessons for the Future," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(1), pages 8-47.
  19. Robert Leeson, 1997. "The Political Economy of the Inflation-Unemployment Trade-Off," History of Political Economy, Duke University Press, vol. 29(1), pages 117-156, Spring.
  20. Robert J. Gordon, 1975. "The Impact of Aggregate Demand on Prices," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(3), pages 613-670.
  21. Gregory, R G, 1986. "Wages Policy and Unemployment in Australia," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S53-74, Supplemen.
  22. Robert J. Gordon, 1977. "Can the Inflation of the 1970s be Explained?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 8(1), pages 253-279.
  23. J. Bradford DeLong & Lawrence H. Summers, 1988. "How Does Macroeconomic Policy Affect Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 433-494.
  24. Joseph Stiglitz, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter.
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