Monetary Policy with Phillips Curve: Lessons from Disinflation in New Zealand

40 Pages Posted: 1 May 2017 Last revised: 5 Jul 2017

Date Written: April 29, 2017


Despite the transparency and independent operations of the central bank, the costly disinflation in the early nineties and the apparent lack of contemporaneous correlation between inflation and unemployment in the subsequent periods brings into question the validity of the Phillips curve hypothesis for the New Zealand economy. Nevertheless, drawing on an empirical exercise built on a narrative history, I argue that the hypothesis remains a valid view of the interaction between the real and nominal sides of the economy if we interpret that history with theories of credibility to account for the dynamics of inflation expectations. Between 1987 and 2015, the survey data of inflation expectations identifies, through either a new classical or a new Keynesian representation, the changing location of the Phillips curve, illustrating how inflation expectations directly affect both inflation and unemployment, without undermining their theoretical relationship. Findings suggest that a credible regime between 1993 and 1999 precipitated a stable manifold of relatively flat Phillips curves. However, probably the loss of credibility in the post-1999 era left the policymakers with a steeper Phillips curve with unstable locations. Use of the nontradable component of the consumer price index (CPI) rather than the CPI as a whole strengthens the policy conclusions based on the Phillips curve hypothesis.

Keywords: Rational Expectations, Phillips Curve, Time Consistency, Credibility, Natural Rate of Unemployment, Lucas' Supply Curve

JEL Classification: A22, B22, E31

Suggested Citation

Bandyopadhyay, Debasis, Monetary Policy with Phillips Curve: Lessons from Disinflation in New Zealand (April 29, 2017). Available at SSRN: or

Debasis Bandyopadhyay (Contact Author)

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand
64-9-373-7599 extn: 7439 (Phone)

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