Report

Is There a Stable Relationship between Unemployment and Future Inflation?


Abstract: The empirical literature on the stability of the Phillips curve has largely ignored the bias that endogenous monetary policy imparts on estimated Phillips curve coefficients. We argue that this omission has important implications. When policy is endogenous, estimation based on aggregate data can be uninformative as to the existence of a stable relationship between unemployment and future inflation. But we also argue that regional data can be used to identify the structural relationship between unemployment and inflation. Using city-level and state-level data from 1977 to 2017, we show that both the reduced form and the structural parameters of the Phillips curve are, to a substantial degree, quite stable over time.

Keywords: Endogenous monetary policy; Stability of the Phillips curve;

JEL Classification: E52; E58;

https://doi.org/10.21034/sr.614

Access Documents

File(s): File format is application/pdf https://www.minneapolisfed.org/research/sr/sr614.pdf

Authors

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Staff Report

Publication Date: 2020-10-07

Number: 614