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Finding a Stable Phillips Curve Relationship: A Persistence-Dependent Regression Mode
We establish that the Phillips curve is persistence-dependent: inflation responds differently to persistent versus moderately persistent (or versus transient) fluctuations in the unemployment gap. Previous work fails to model this dependence, so it finds numerous “inflation puzzles”—such as missing inflation/disinflation—noted in the literature. Our model specification eliminates these puzzles; for example, the Phillips curve has not weakened, and inflation is not “stubbornly low” at present. The model’s coefficients are stable, and it provides accurate conditional recursive ...
Variation in the Phillips Curve Relation across Three Phases of the Business Cycle
We use recently developed econometric tools to demonstrate that the Phillips curve unemployment rate?inflation rate relationship varies in an economically meaningful way across three phases of the business cycle. The first (?bust phase?) relationship is the one highlighted by Stock and Watson (2010): A sharp reduction in inflation occurs as the unemployment rate is rising rapidly. The second (?recovery phase?) relationship occurs as the unemployment rate subsequently begins to fall; during this phase, inflation is unrelated to any conventional unemployment gap. The final (?overheating phase?) ...