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Stabilization Theory and Policy: 50 Years after the Phillips Curve

  • Stephen J. Turnovsky

This paper discusses the impact of A. W. H. Phillips' seminal contributions to stabilization policy on subsequent developments in that field. We review the policy rules introduced by Phillips and show how these relate to the optimal rules emerging from linear–quadratic optimization problems. The consequences of rational expectations for the design of optimal stabilization policy are discussed. These challenges arose from the role of ‘forward-looking’ variables, through issues such as the ‘Lucas Critique’ and the ‘time consistency’ of policy. The paper also discusses some of the contemporary aspects of stabilization policy, thereby highlighting the durability of Phillips' contributions.

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Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2008-09-FC.

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Date of creation: May 2008
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Publication status: Forthcoming in Economica
Handle: RePEc:udb:wpaper:uwec-2008-09-fc
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Web page: http://www.econ.washington.edu/
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  1. Turnovsky, Stephen J, 1976. "Optimal Stabilization Policies for Stochastic Linear Systems: The Case of Correlated Multiplicative and Additive Disturbances," Review of Economic Studies, Wiley Blackwell, vol. 43(1), pages 191-94, February.
  2. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 51(4), pages 1169-85, July.
  3. David Backus & John Driffill, 1984. "Inflation and Reputation," Working Papers 560, Queen's University, Department of Economics.
  4. Willem H. Buiter, 1984. "Saddlepoint Problems in Contifuous Time Rational Expectations Models: A General Method and Some Macroeconomic Ehamples," NBER Technical Working Papers 0020, National Bureau of Economic Research, Inc.
  5. Thomas J. Sargent, 1971. "The Optimum Monetary Instrument Variable in a Linear Economic Model," Canadian Journal of Economics, Canadian Economics Association, vol. 4(1), pages 50-60, February.
  6. Turnovsky, Stephen J, 1973. "Optimal Stabilization Policies for Deterministic and Stochastic Linear Economic Systems," Review of Economic Studies, Wiley Blackwell, vol. 40(1), pages 79-95, January.
  7. Marcus Miller & Mark Salmon, 1985. "Policy Coordination and Dynamic Games," NBER Chapters, in: International Economic Policy Coordination, pages 184-227 National Bureau of Economic Research, Inc.
  8. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
  9. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  10. Turnovsky, Stephen J, 1980. "The Choice of Monetary Instrument under Alternative Forms of Price Expectations," The Manchester School of Economic & Social Studies, University of Manchester, vol. 48(1), pages 39-62, March.
  11. Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, vol. 45(6), pages 1377-85, September.
  12. Martin Feldstein & James H. Stock, 1994. "The Use of a Monetary Aggregate to Target Nominal GDP," NBER Chapters, in: Monetary Policy, pages 7-69 National Bureau of Economic Research, Inc.
  13. Kendrick, David A., 2005. "Stochastic control for economic models: past, present and the paths ahead," Journal of Economic Dynamics and Control, Elsevier, vol. 29(1-2), pages 3-30, January.
  14. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
  15. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  16. repec:cup:cbooks:9780521291873 is not listed on IDEAS
  17. Persson, T. & Tabellini, G., 1997. "Political Economics and Macroeconomic Policy," Papers 630, Stockholm - International Economic Studies.
  18. Hans Amman & David Kendrick, 2000. "Mitigation Of The Lucas Critique With Stochastic Control Methods," Computing in Economics and Finance 2000 182, Society for Computational Economics.
  19. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  20. Sargent, Thomas J. & Wallace, Neil, 1976. "Rational expectations and the theory of economic policy," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 169-183, April.
  21. Robert A. Mundell, 1962. "The Appropriate Use of Monetary and Fiscal Policy for Internal and External Stability," IMF Staff Papers, Palgrave Macmillan, vol. 9(1), pages 70-79, March.
  22. Kendrick, David, 1982. "Caution and probing in a macroeconomic model," Journal of Economic Dynamics and Control, Elsevier, vol. 4(1), pages 149-170, November.
  23. 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.
  24. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  25. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  26. Turnovsky, Stephen J., 1981. "The optimal intertemporal choice of inflation and unemployment An analysis of the steady state and transitional dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 3(1), pages 357-384, November.
  27. McCallum, Bennett T., 1981. "Price level determinacy with an interest rate policy rule and rational expectations," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 319-329.
  28. Brock, William A. & Durlauf, Steven N. & Nason, James M. & Rondina, Giacomo, 2007. "Simple versus optimal rules as guides to policy," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1372-1396, July.
  29. David Currie & Paul Levine, 1985. "Macroeconomic Policy Design in an Interdependent World," NBER Chapters, in: International Economic Policy Coordination, pages 228-273 National Bureau of Economic Research, Inc.
  30. Amman, Hans M. & Kendrick, David A., 1994. "Active learning Monte Carlo results," Journal of Economic Dynamics and Control, Elsevier, vol. 18(1), pages 119-124, January.
  31. Henderson, Dale W. & Turnovsky, Stephen J., 1972. "Optimal macroeconomic policy adjustment under conditions of risk," Journal of Economic Theory, Elsevier, vol. 4(1), pages 58-71, February.
  32. Sargent, Thomas J & Wallace, Neil, 1973. "The Stability of Models of Money and Growth with Perfect Foresight," Econometrica, Econometric Society, vol. 41(6), pages 1043-48, November.
  33. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination in Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
  34. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76, pages 678.
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