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Structural Evolution of the Postwar U.S. Economy

  • Yuelin Liu

    ()

    (School of Economics, Australian School of Business, the University of New South Wales)

  • James Morley

    ()

    (School of Economics, Australian School of Business, the University of New South Wales)

We consider a time-varying parameter vector autoregressive model with stochastic volatility and mixture innovations to study the empirical relevance of the Lucas critique for the postwar U.S. economy. The model allows blocks of parameters to change at endogenously-estimated points of time. Contrary to the Lucas critique, there are large changes at certain points of time in the parameters associated with monetary policy that do not correspond to changes in “reduced-form” parameters for inflation or the unemployment rate. However, the structure of the U.S. economy has evolved considerably over the postwar period, with an apparent reduction in the late 1980s in the impact of monetary policy shocks on inflation, though not on the unemployment rate. Related, we find changes in the Phillips Curve tradeoff between inflation and cyclical unemployment (measured as the deviation from the time-varying steady-state unemployment rate implied by the model) in the 1970s and especially since the mid-1990s.

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File URL: http://research.economics.unsw.edu.au/RePEc/papers/2013-15.pdf
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Paper provided by School of Economics, The University of New South Wales in its series Discussion Papers with number 2013-15A.

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Length: 42 pages
Date of creation: Jun 2013
Date of revision:
Handle: RePEc:swe:wpaper:2013-15a
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