Structural Evolution of the Postwar U.S. Economy

42 Pages Posted: 12 Jun 2013 Last revised: 10 Mar 2014

See all articles by Yuelin Liu

Yuelin Liu

Sun Yat-sen University

James Morley

University of Sydney

Date Written: March 7, 2014

Abstract

We consider a time-varying parameter vector autoregressive model with stochastic volatility and mixture innovations to study the empirical relevance of the Lucas critique for the postwar U.S. economy. The model allows blocks of parameters to change at endogenously-estimated points of time. Contrary to the Lucas critique, there are large changes at certain points of time in the parameters associated with monetary policy that do not correspond to changes in “reduced-form” parameters for inflation or the unemployment rate. However, the structure of the U.S. economy has evolved considerably over the postwar period, with an apparent reduction in the late 1980s in the impact of monetary policy shocks on inflation, though not on the unemployment rate. Related, we find changes in the Phillips Curve tradeoff between inflation and cyclical unemployment (measured as the deviation from the time-varying steady-state unemployment rate implied by the model) in the 1970s and especially since the mid-1990s.

Keywords: Time-varying parameters, Mixture innovations, Lucas critique, Great Moderation, Natural Rate of Unemployment, Phillips Curve

JEL Classification: C11, E24, E32

Suggested Citation

Liu, Yuelin and Morley, James, Structural Evolution of the Postwar U.S. Economy (March 7, 2014). UNSW Australian School of Business Research Paper No. 2013-15A. Available at SSRN: https://ssrn.com/abstract=2277334 or http://dx.doi.org/10.2139/ssrn.2277334

Yuelin Liu (Contact Author)

Sun Yat-sen University ( email )

Guangzhou
China

James Morley

University of Sydney ( email )

Rm 370 Merewether (H04)
Sydney, NSW 2006 2008
Australia

HOME PAGE: http://https://sites.google.com/site/jamescmorley/

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