Estimates of the Inflation versus Unemployment Tradeoff that are not Model Dependent

Jonathan E. Leightner ()
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Jonathan E. Leightner: Hull College of Business, Augusta, Georgia, United States

Journal of Central Banking Theory and Practice, 2020, vol. 9, issue 1, 5-21

Abstract: For governments who want to improve their economies via fiscal, monetary, trade or exchange rate policies, the tradeoff between the inflation rate and the unemployment rate is extremely important. This tradeoff has become known as the Phillips curve. Among economists there is no consensus on how to model and estimate the Phillips curve. Ideally, all the factors that could affect the Aggregate Supply and Aggregate Demand curves should be included in the model including exchange rates, transportation costs, infrastructure, weather, income distribution, etc. No researcher has created a model that could not be criticized for omitting some important variables. This paper use Bi-Directional Reiterative Truncated Least Squares, a statistical technique that solves the omitted variables problem, to estimate the tradeoff between inflation and unemployment for 34 countries between 2002 and 2017. I find that this tradeoff varies noticeably from country to country in a given year, but that many of these tradeoffs move in the same direction over time. This common direction of movement implies that the international context for the vast majority of the countries studied is affecting the inflation versus unemployment tradeoff.

Keywords: Phillips Curve; Inflation; Unemployment; Omitted Variables; Trade-off. (search for similar items in EconPapers)
JEL-codes: E60 J21 (search for similar items in EconPapers)
Date: 2020
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