What's Happened to the Phillips Curve?

39 Pages Posted: 10 Jan 2000

See all articles by Flint Brayton

Flint Brayton

Board of Governors of the Federal Reserve System

John M. Roberts

Board of Governors of the Federal Reserve System

John C. Williams

Federal Reserve Bank of New York

Date Written: September 20, 1999

Abstract

The simultaneous occurrence in the second half of the 1990s of low and falling price inflation and low unemployment appears to be at odds with the properties of a standard Phillips curve. We find this result in a model in which inflation depends on the unemployment rate, past inflation, and conventional measures of price supply shocks. We show that, in such a model, long lags of past inflation are preferred to short lags, and that with long lags, the NAIRU is estimated precisely but is unstable in the 1990s. Two alternative modifications to the standard Phillips curve restore stability. One replaces the unemployment rate with capacity utilization. Although this change leads to more accurate inflation predictions in the recent period, the predictive ability of the utilization rate is not superior to that of the unemployment rate for the 1955 to 1998 sample as a whole. The second, and preferred, modification augments the standard Phillips curve to include an "error-correction" mechanism involving the markup of prices over trend unit labor costs. With the markup relatively high through much of the 1990s, this channel is estimated to have held down inflation over this period, and thus provides an explanation of the recent low inflation.

JEL Classification: E31

Suggested Citation

Brayton, Flint and Roberts, John M. and Williams, John C., What's Happened to the Phillips Curve? (September 20, 1999). Available at SSRN: https://ssrn.com/abstract=190852 or http://dx.doi.org/10.2139/ssrn.190852

Flint Brayton (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

John M. Roberts

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2946 (Phone)

John C. Williams

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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