Evolving Inflation Dynamics and the New Keynesian Phillips Curve
23 Pages Posted: 9 Dec 2012
Date Written: 2007
In economic policy discussions, the negative correlation between inflation rates and unemployment rates or output growth, also known as the Phillips curve, is often invoked as representing a structural tradeoff between inflation and real activity. Arguments by Friedman and Phelps in the late 1960s and the subsequent experience of high inflation and low output growth in the 1970s convinced most economists that the Phillips curve is indeed not invariant to changes in economic policy. Recently, a variant of the Phillips curve, the New Keynesian Phillips Curve (NKPC), has gained popularity among monetary policymakers and economists as a structural representation of the inflation-output tradeoff. In this article, I study whether the NKPC can indeed be viewed as a structural relationship.
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