The Post-War U.S. Phillips Curve: A Revisionist Econometric History

Robert King and Mark Watson
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Robert King: University of Virginia
Mark Watson: Northwestern University

Working Papers from Princeton University. Economics Department.

Abstract: In 1958, A.W. Phillips discovered a strong negative correlation between inflation and unemployment in United Kingdom data. Continuing controversy surrounds the long-run trade-off suggested by a curve he drew through these observations. We conduct a wide-ranging investigation of the post-war U.S. Phillips correlations and Phillips curve. Many economists view the Phillips correlations as chimerical, given the rise in both inflation and unemployment during the 1970s, and the Phillips curve as plagued by subtle identification difficulties raised by Lucas and Sargent. Yet, a strikingly stable negative correlation exists over the business cycle, and recent theory indicates the Lucas-Sargent critique may not be empirically relevant. When we estimate the long-run trade-off as Gordon and Solow did, we find it is roughly one-for-one. This traditional Keynesian identification also makes business cycles entirely due to demand shocks. However, the Gordon-Solow model is not the only one that fits the data well. Alternative identifications lead to much more modest effects of demand on business cycles and essentially negligible long-run trade-offs.

Keywords: U.S.; Northern America; History; Phillips Curve (search for similar items in EconPapers)
JEL-codes: C51 E24 E31 N11 N12 (search for similar items in EconPapers)
Date: 1994-06
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:1994-2

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