Must-read: Olivier Blanchard: The US Phillips Curve: Back to the 60s?
Must-Read: Olivier Blanchard says that he and Paul Krugman differ not at all on the analytics but, rather, substantially on “tone”…
It looks as though the center of the Federal Reserve is working today as if the slope of the Phillips-Curve relationship is still what it was in the years around 1980, and that the gearing of expected inflation to recent-past inflation is still what it was in the years around 1980.
Why this is so is a mystery.
: The US Phillips Curve: Back to the 60s?: “The US Phillips curve is alive…
…(I wish I could say “alive and well,” but it would be an overstatement: the relation has never been very tight.) Inflation expectations, however, have become steadily more anchored, leading to a relation between the unemployment rate and the level… rather than the change in in inflation… [that] resembles more the Phillips curve of the 1960s than the accelerationist Phillips curve of the later period. The slope of the Phillips curve… has substantially declined…. The standard error of the residual… is large…. Each of the last three conclusions presents challenges for the conduct of monetary policy…