Inside and outside bounds: threshold estimates of the Phillips curve
Michelle Barnes and
New England Economic Review, 2003, 3-18
Over the past 30 years, debates about the usefulness of the Phillips curve for explaining inflation have been ongoing. One of the reasons for the recurring debate about the existence of an inflation and unemployment tradeoff is that there have been several instances when large movements in the unemployment rate have elicited little response in the inflation rate. In principle, these episodes of horizontal movement are consistent with a Phillips curve relationship; they just require the curve to shift in the same direction as the unemployment rate. Econometric representations of the Phillips relationship usually incorporate factors that can cause the Phillips curve to shift over time. However, the literature has not yet provided a test of whether such factors are sufficient to explain the episodes of horizontal movement. ; In this paper, the authors test the explanatory power of a piecewise linear specification of the Phillips relationship against a simple linear specification. The authors find that a piecewise linear specification of the Phillips curve provides a good characterization of inflation dynamics over the past 40 years and that the traditional shifters in the relationships are insufficient to characterize the episodes of horizontal movement. Apparently, the gap between the unemployment rate and the natural rate of unemployment must be outside of some threshold values before triggering a response in inflation. This suggests that monetary policy should aim to drive the unemployment rate lower until the lower limit of the inflation range is reached; however, such a strategy is complicated by the fact that the lower unemployment limit is estimated with uncertainty, leaving the policy implications open to debate.
Keywords: Phillips; curve (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33) Track citations by RSS feed
Downloads: (external link)
Working Paper: Inside and Outside Bounds: Threshold Estimates of the Phillips Curve (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedbne:y:2003:p:3-18
Ordering information: This journal article can be ordered from
Access Statistics for this article
More articles in New England Economic Review from Federal Reserve Bank of Boston Contact information at EDIRC.
Bibliographic data for series maintained by ().