IDEAS home Printed from https://ideas.repec.org/p/rba/rbardp/rdp9706.html
   My bibliography  Save this paper

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

Author

Listed:
  • Guy Debelle

    (Reserve Bank of Australia)

  • James Vickery

    (Reserve Bank of Australia)

Abstract

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.

Suggested Citation

  • Guy Debelle & James Vickery, 1997. "Is the Phillips Curve a Curve? Some Evidence and Implications for Australia," RBA Research Discussion Papers rdp9706, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp9706
    as

    Download full text from publisher

    File URL: https://www.rba.gov.au/publications/rdp/1997/pdf/rdp9706.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. repec:bla:ecorec:v:63:y:1987:i:181:p:144-55 is not listed on IDEAS
    2. Michael G. Kirby, 1981. "An Investigation of the Specification and Stability of the Australian Aggregate Wage Equation," The Economic Record, The Economic Society of Australia, vol. 57(1), pages 35-46, March.
    3. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173, December.
    4. Douglas Laxton & Guy Meredith & David Rose, 1995. "Asymmetric Effects of Economic Activity on Inflation: Evidence and Policy Implications," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 344-374, June.
    5. 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.
    6. Guy Debelle & James Vickery, 1998. "Is the Phillips Curve A Curve? Some Evidence and Implications for Australia," The Economic Record, The Economic Society of Australia, vol. 74(227), pages 384-398, December.
    7. 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.
    8. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
    9. Marco A. Espinosa-Vega & Steven Russell, 1997. "History and theory of the NAIRU: a critical review," Economic Review, Federal Reserve Bank of Atlanta, vol. 82(Q 2), pages 4-25.
    10. 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.
    11. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters, in: Monetary Policy, pages 155-193, National Bureau of Economic Research, Inc.
    12. A. W. Phillips, 1958. "The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957," Economica, London School of Economics and Political Science, vol. 25(100), pages 283-299, November.
    13. 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.
    14. Erica Groshen & Mark Schweitzer, 1999. "Identifying Inflation's Grease and Sand Effects in the Labor Market," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 273-314, National Bureau of Economic Research, Inc.
    15. 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, June.
    16. Mr. Peter B. Clark & Mr. Douglas Laxton & David Rose, 1995. "Capacity Constraints, Inflation and the Transmission Mechanism: Forward-Looking Versus Myopic Policy Rules," IMF Working Papers 1995/075, International Monetary Fund.
    17. 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.
    18. Rao, B Bhaskara, 1977. "An Analysis of the Short and Long-run Trade-offs between Unemployment and Inflation and Estimates of the Equilibrium Steady State Unemployment Rate in Australia," Australian Economic Papers, Wiley Blackwell, vol. 16(29), pages 273-284, December.
    19. 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.
    20. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
    21. R.M. Simes & C.J. Richardson, 1987. "Wage Determination In Australia," The Economic Record, The Economic Society of Australia, vol. 63(2), pages 144-155, June.
    22. Mitchell, William F, 1987. "The Nairu, Structural Imbalance and the Macroequilibrium Unemployment Rate," Australian Economic Papers, Wiley Blackwell, vol. 26(48), pages 101-118, June.
    23. 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.
    24. Guy Debelle & Douglas Laxton, 1997. "Is the Phillips Curve Really a Curve? Some Evidence for Canada, the United Kingdom, and the United States," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 249-282, June.
    25. Parkin, Michael, 1973. "The Short-Run and Long-Run Trade-Offs Between Inflation and Unemployment in Australia," Australian Economic Papers, Wiley Blackwell, vol. 12(21), pages 127-144, December.
    26. repec:fth:harver:1418 is not listed on IDEAS
    27. Roberts, John M., 1997. "Is inflation sticky?," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 173-196, July.
    28. 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.
    29. Ford, Robert & Laxton, Douglas, 1999. "World Public Debt and Real Interest Rates," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 15(2), pages 77-94, Summer.
    30. Jonson, P D & Mahar, K L & Thompson, G J, 1974. "Earnings and Award Wages in Australia," Australian Economic Papers, Wiley Blackwell, vol. 13(22), pages 80-98, June.
    31. Roberto Chang, 1997. "Is low unemployment inflationary?," Economic Review, Federal Reserve Bank of Atlanta, vol. 86(Q I), pages 4-13.
    32. Joseph Stiglitz, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter.
    33. Lynne Cockerell & Bill Russell, 1995. "Australian Wage and Price Inflation: 1971-1994," RBA Research Discussion Papers rdp9509, Reserve Bank of Australia.
    34. repec:bla:ecorec:v:57:y:1981:i:156:p:35-46 is not listed on IDEAS
    35. Peter Clark & Douglas Laxton & David Rose, 1996. "Asymmetry in the U.S. Output-Inflation Nexus," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 216-251, March.
    36. Nevile, John W, 1977. "Domestic and Overseas Influences on Inflation in Australia," Australian Economic Papers, Wiley Blackwell, vol. 16(28), pages 121-129, June.
    37. repec:bla:econom:v:53:y:1986:i:210(s):p:s53-74 is not listed on IDEAS
    38. Mr. Domenico Fanizza & Mr. Vito Tanzi, 1995. "Fiscal Deficit and Public Debt in Industrial Countries, 1970-1994," IMF Working Papers 1995/049, International Monetary Fund.
    39. Mr. Douglas Laxton & Mr. Peter B. Clark, 1997. "Phillips Curves, Phillips Lines and the Unemplyment Costs of Overheating," IMF Working Papers 1997/017, International Monetary Fund.
    40. Kenneth N. Kuttner, 1992. "Monetary policy with uncertain estimates of potential output," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 16(Jan), pages 2-15.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marco Gross & Willi Semmler, 2019. "Mind the Output Gap: The Disconnect of Growth and Inflation during Recessions and Convex Phillips Curves in the Euro Area," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 81(4), pages 817-848, August.
    2. Gruen, David & Pagan, Adrian & Thompson, Christopher, 1999. "The Phillips curve in Australia," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 223-258, October.
    3. Jeff Borland & Ian McDonald, 2000. "Labour Market Models of Unemployment in Australia," Melbourne Institute Working Paper Series wp2000n15, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    4. Hasanov, Mübariz & Araç, Aysen & Telatar, Funda, 2010. "Nonlinearity and structural stability in the Phillips curve: Evidence from Turkey," Economic Modelling, Elsevier, vol. 27(5), pages 1103-1115, September.
    5. Kumar, Anil & M. Orrenius, Pia, 2016. "A closer look at the Phillips curve using state-level data," Journal of Macroeconomics, Elsevier, vol. 47(PA), pages 84-102.
    6. David Mayes & Matti Viren, 2002. "Asymmetry and the Problem of Aggregation in the Euro Area," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 29(1), pages 47-73, March.
    7. Rod Cross & Julia Darby & Jonathan Ireland, 1997. "Uncertainties Surrounding Natural Rate Estimates in the G7," Working Papers 9712, Business School - Economics, University of Glasgow.
    8. Laxton, Douglas & Rose, David & Tambakis, Demosthenes, 1999. "The U.S. Phillips curve: The case for asymmetry," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1459-1485, September.
    9. Mayes, David & Virén, Matti, 2004. "Asymmetries in the Euro area economy," Bank of Finland Research Discussion Papers 9/2004, Bank of Finland.
    10. Harold Ngalawa & Coretha Komba, 2020. "Inflation‐Output Trade‐Off in South Africa: Is the Phillips Curve Symmetric?," South African Journal of Economics, Economic Society of South Africa, vol. 88(4), pages 472-494, December.
    11. Bozani, Vasiliki & Drydakis, Nick, 2011. "Studying the NAIRU and its Implications," IZA Discussion Papers 6079, Institute of Labor Economics (IZA).
    12. Peter Isard & Douglas Laxton & Ann-Charlotte Eliasson, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(4), pages 537-577, November.
    13. Eliasson, Ann-Charlotte, 2001. "Is the Short-run Phillips Curve Nonlinear? Empirical Evidence for Australia, Sweden and the United States," Working Paper Series 124, Sveriges Riksbank (Central Bank of Sweden).
    14. Valerija Botric, 2012. "NAIRU estimates for Croatia," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 30(1), pages 163-180.
    15. Bill Russell & Anindya Banerjee & Issam Malki & Natalia Ponomareva, 2010. "A Multiple Break Panel Approach to Estimating United States Phillips Curves," Discussion Papers 10-14, Department of Economics, University of Birmingham.
    16. Russell, Bill, 2011. "Non-stationary inflation and panel estimates of United States short and long-run Phillips curves," Journal of Macroeconomics, Elsevier, vol. 33(3), pages 406-419, September.
    17. Pyyhtiä, Ilmo, 1999. "The nonlinearity of the Phillips curve and European monetary policy," Bank of Finland Research Discussion Papers 17/1999, Bank of Finland.
    18. Mayes, David G. & Viren, Matti, 2005. "Monetary policy problems for currency unions: asymmetry and the problem of aggregation in the euro area," Economic Modelling, Elsevier, vol. 22(2), pages 219-251, March.
    19. Volker Wieland, "undated". "Monetary Policy and Uncertainty about the Natural Unemployment Rate," Computing in Economics and Finance 1997 11, Society for Computational Economics.
    20. Backhouse, Roger E. & Forder, James & Laskaridis, Christina, 2023. "The natural rate of unemployment and the NAIRU," European Economic Review, Elsevier, vol. 159(C).

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rba:rbardp:rdp9706. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Paula Drew (email available below). General contact details of provider: https://edirc.repec.org/data/rbagvau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.