What Makes the Output–Inflation Trade‐Off Change? The Absence of Accelerating Deflation in Japan

It is standard to model the output–inflation trade-off as a linear relationship with a time-invariant slope. We assess empirical evidence for two sets of theories that allow for endogenous variation in the slope of the short-run Phillips curve. At an empirical level, we examine why large negative output gaps in Japan in the late 1990s did not lead to accelerating deflation but instead coincided with stable, albeit moderately negative inflation. Our results suggest that this episode is most convincingly interpreted as reflecting a gradual flattening of the Phillips curve. We find that this flattening is best explained by models with endogenous price durations. These models imply that in any economy where trend inflation is substantially lower (or substantially higher) today than in past decades, time variation in the slope of the Phillips curve has become too important to ignore.     

Downward Nominal Wage Rigidities Bend the Phillips Curve

We introduce a model of monetary policy with downward nominal wage rigidities and show that both the slope and curvature of the Phillips curve depend on the level of inflation and the extent of downward nominal wage rigidities. This is true for the both the long‐run and the short‐run Phillips curve. Comparing simulation results from the model with data on U.S. wage patterns, we show that downward nominal wage rigidities likely have played a role in shaping the dynamics of unemployment and wage growth during the last three recessions and subsequent recoveries.     

How Important Is Money in the Conduct of Monetary Policy?

I consider some of the leading arguments for assigning an important role to tracking the growth of monetary aggregates when making decisions about monetary policy. First, I consider whether ignoring money means returning to the conceptual framework that allowed the high inflation of the 1970s. Second, I consider whether models of inflation determination with no role for money are incomplete, or inconsistent with elementary economic principles. Third, I consider the implications for monetary policy strategy of the empirical evidence for a long‐run relationship between money growth and inflation. And fourth, I consider reasons why a monetary policy strategy based solely on short‐run inflation forecasts derived from a Phillips curve may not be a reliable way of controlling inflation. I argue that none of these considerations provides a compelling reason to assign a prominent role to monetary aggregates in the conduct of monetary policy.     

Notes on the Underground: Monetary Policy in Resource‐Rich Economies

The central bank of a commodity‐exporting small open economy faces the traditional trade‐off between domestic inflation and output gap. The commodity sector introduces a terms‐of‐trade inefficiency that gives rise to an endogenous cost‐push shock, changes the target level for output, reduces the slope of the Phillips curve, and increases the importance of stabilizing the output gap. Optimal monetary policy calls for a reduction of the interest rate following a drop in the oil price. In contrast, a central bank with a mandate to stabilize consumer price inflation raises interest rates to limit the inflationary impact of an exchange rate depreciation.     

Intrinsic Persistence of Wage Inflation in New Keynesian Models of the Business Cycles

We derive and estimate a New Keynesian wage Phillips curve that accounts for intrinsic inertia. In line with microevidence on wage setting, we consider a wage‐setting model featuring an upward‐sloping hazard function, based on the notion that the probability of resetting a wage depends on the time elapsed since the last reset. Our wage Phillips curve embeds also backward terms. We test the hazard function slope using generalized method of moment estimation. Then, placing our equation in a small‐scale New Keynesian model, we investigate its dynamic properties using Bayesian estimation. Model comparison shows that our model outperforms commonly used alternative methods to introduce persistence.     

The New Keynesian Phillips Curve: From Sticky Inflation to Sticky Prices

The New Keynesian Phillips Curve (NKPC) model of inflation dynamics based on forward-looking expectations is of great theoretical significance in monetary policy analysis. Empirical studies, however, often find that backward-looking inflation inertia dominates the dynamics of the short-run aggregate supply curve. This inconsistency is examined by investigating multiple structural changes in the NKPC for the U.S. between 1960 and 2005, employing both inflation expectations survey data and a rational expectations approximation. We find that forward-looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation, providing empirical support for sticky price models over the last two decades. A break in the intercept of the NKPC is also identified around 2001 and this may be associated with U.S. monetary policy in that period.     

Estimating New-Keynesian Phillips curves: A full information maximum likelihood approach

The New-Keynesian Phillips curve has recently become an important ingredient in monetary policy models. However, using limited information methods, the empirical support for the New-Keynesian Phillips curve appear to be mixed. This paper argues, by means of Monte Carlo simulations with a simple New-Keynesian sticky price model, that single equations methods, e.g. GMM, are likely to produce imprecise and biased estimates. Then, it is argued that estimating the model with full information maximum likelihood (FIML) is a useful way of obtaining better estimates. Finally, a version of the model used in the Monte Carlo simulations is estimated on U.S. data with FIML and although the pure forward-looking New-Keynesian Phillips curve is rejected, a version with both forward- and backward-looking components provides a reasonable approximation of U.S. inflation dynamics.     

The timeless perspective vs. discretion: Theory and monetary policy implications for an open economy

Compared to the standard Phillips curve, an open-economy version that features a real exchange rate channel leads to a markedly different target rule in a New Keynesian optimizing framework. Under optimal policy from a timeless perspective (TP) the target rule involves additional history dependence in the form of lagged inflation. The target rule also depends on more parameters, notably the discount factor as well as two IS and two Phillips curve parameters. Stabilization policy in this open economy model is no longer isomorphic to policy in a closed economy. Because of the additional history dependence in an open economy target rule, price level targeting is no longer consistent with optimal policy. The gains from commitment are smaller in economies where the real exchange rate channel exerts a direct effect on inflation in the Phillips curve.     

Optimal monetary policy in an economy with inflation persistence

This paper studies optimal monetary policy in a model where inflation is persistent. Two types of price setters are assumed to exist. One acts rationally given Calvo-type constraints on price setting. The other type sets prices according to a rule-of-thumb. This results in a Phillips curve with both a forward-looking term and a backward-looking term. The Phillips curve nests a standard purely forward-looking Phillips curve as well as a standard purely backward-looking Phillips curve as special cases. A cost push supply shock is derived from microfoundations by adding a time varying income tax and by making the elasticity of substitution between goods stochastic. A central bank loss function for this model is derived from a second-order Taylor approximation of the household's welfare function. Optimal monetary policy for different relative values of the forward- and backward-looking terms is then analyzed for both the commitment case and the case of discretion.     

The Phillips curve under state-dependent pricing

We derive a Phillips curve equation from the dynamic stochastic general equilibrium (DSGE) model with state-dependent pricing developed by Dotsey et al. [1999. State-dependent pricing and the general equilibrium dynamics of money and output. Quarterly Journal of Economics 114, 655-690]. This state-dependent Phillips curve encompasses the new Keynesian Phillips curve (NKPC) based on Calvo-type price setting as a special case. We analyze the effect of the state-dependent terms (that is, the variations in the distributions of price vintages) on inflation persistence, and we examine whether the hybrid NKPC (that is, the NKPC extended by a lagged inflation term) can adequately describe inflation dynamics generated in a calibrated state-dependent pricing economy.     

Endogenous nominal rigidities and monetary policy

Recent empirical research finds that the degree of nominal rigidities varies over monetary policy regimes. This implies that monetary policy analysis with exogenously given nominal rigidities is subject to the Lucas critique. We allow firms to choose the probability of price adjustment in a Calvo-style sticky price model, and analyze how this probability changes according to an inflation coefficient of the Taylor rule. The model shows that a more aggressive monetary policy response to inflation makes firms less likely to reset prices and gives the resulting New Keynesian Phillips curve a flatter slope and a smaller disturbance, as observed during the Volcker-Greenspan era. Also, such a policy response can stabilize both inflation and the output gap by exploiting the feedback effects of this policy response on firms’ price-setting. These results offer theoretical support for the good policy hypothesis about the Great Moderation.     

A Survey of New Keynesian Theories of Aggregate Supply and Their Relation to Industrial Organization

I survey the recent literature on the Phillips curve. Along the way, I will try to relate this literature to topics of interest to industrial organization. I will also point out the gaps in our understanding and places where more careful micro‐economic analysis would be helpful to macroeconomists. In the conclusion, I summarize what an industrial organization economist might take away from this literature.     

The Impact of Central Bank Independence on Political Monetary Cycles in Advanced and Developing Nations

This paper examines the extent to which monetary policy is manipulated for political purposes during elections. We do not detect political monetary cycles in advanced countries or developing nations with independent central banks. We do find evidence, however, in developing countries that lack central bank independence. Furthermore, we find some evidence that these cycles are not caused by monetization of election-related fiscal expansions. This suggests that pressure by politicians on the central bank to exploit the Phillips curve may be an important factor in generating political monetary cycles.     

Discretionary monetary policy and the zero lower bound on nominal interest rates

Ignoring the existence of the zero lower bound on nominal interest rates one considerably understates the value of monetary commitment in New Keynesian models. A stochastic forward-looking model with an occasionally binding lower bound, calibrated to the U.S. economy, suggests that low values for the natural rate of interest lead to sizeable output losses and deflation under discretionary monetary policy. The fall in output and deflation are much larger than in the case with policy commitment and do not show up at all if the model abstracts from the existence of the lower bound. The welfare losses of discretionary policy increase even further when inflation is partly determined by lagged inflation in the Phillips curve. These results emerge because private sector expectations and the discretionary policy response to these expectations reinforce each other and cause the lower bound to be reached much earlier than under commitment.     

Optimal Monetary Policy in a Model with Agency Costs

This paper integrates a fully explicit model of agency costs into an otherwise standard Dynamic New Keynesian model in a particularly transparent way. A principal result is the characterization of agency costs as endogenous markup shocks in an output‐gap version of the Phillips curve. The model's utility‐based welfare criterion is derived explicitly and includes a measure of credit market tightness that we interpret as a risk premium. The paper also fully characterizes optimal monetary policy and provides conditions under which zero inflation is the optimal policy. Finally, optimal policy can be expressed as an inflation targeting criterion that (depending upon parameter values) can be either forward or backward looking.     

Maintaining low inflation: Money, interest rates, and policy stance

This paper presents a systematic empirical relationship between money and subsequent prices and output, using US, euro area and Swiss data since the 1960-1970s. Monetary developments, unlike interest rate stance measures, are shown to provide qualitative and quantitative information on subsequent inflation. The usefulness of monetary analysis is contrasted to weaknesses in modeling monetary policy and inflation with respectively short-term interest rates and real activity measures. The analysis sheds light on the recent change in inflation volatility and persistence as well as on the Phillips curve flattening, and reveals drawbacks in pursuing a low inflation target without considering monetary aggregates.     

The Time-Varying Phillips Correlation

We use complex demodulation techniques to investigate changes in the correlation between real activity and inflation at the business-cycle frequencies in the United States, the United Kingdom, the Eurozone, and 10 other Organization for Economic Cooperation and Development (OECD) countries over the post-WWII era. Consistent with the analysis of Ball, Mankiw, and Romer (1988) we document a positive correlation between the time-varying average gain of real activity onto inflation at the business-cycle frequencies and inflation's Hodrick-Prescott trend, which is compatible with New Keynesian theories emphasizing the link between trend inflation, the frequency of price adjustments, and the slope of the Phillips trade-off.     

通胀—增长权衡和中国菲利普斯曲线的平坦化

近年来发达经济体出现了菲利普斯曲线平坦化现象,但有关中国的研究尚缺乏共识。本文基于实证和理论分析,系统研究了中国菲利普斯曲线的平坦化问题。首先,结合货币政策冲击和月度SVAR框架,发现通胀的响应程度在2010年后大幅下降。由于证据显示总需求曲线并未平坦化,因此通胀响应弱化可解读为菲利普斯曲线的平坦化。数据显示,菲利普斯曲线平坦化与生产率增长放缓同时发生,因此,本文在标准DSGE模型中引入纵向内生增长渠道,该渠道基于研发投入和知识资本积累,从而使生产率内生于经济周期。研究发现：(1)内生增长渠道放大了需求冲击对产出的影响,但缩小了需求冲击对通胀的影响;(2)内生增长渠道改变通胀和增长之间的替代关系,但不改变边际成本向通胀的传导。分段估计显示,2010年后,通胀和增长的关系弱化是边际成本传导变弱和内生增长渠道变强共同作用的结果。本文认为,由于菲利普斯曲线的平坦化,中央银行应继续坚持稳增长和就业优先战略,关注但不必过于担心由此引发的通胀压力。     

A Phillips Curve with Anchored Expectations and Short‐Term Unemployment

This paper examines the behavior of U.S. core inflation, as measured by the weighted median of industry price changes. We find that core inflation since 1985 is well‐explained by an expectations‐augmented Phillips curve in which expected inflation is measured with professional forecasts and labor‐market slack is captured by the short‐term unemployment rate. We also find that expected inflation was backward‐looking until the late 1990s, but then became strongly anchored at the Federal Reserve's target. This shift in expectations changed the relationship between inflation and unemployment from an accelerationist Phillips curve to a level‐level Phillips curve. Our specification explains why high unemployment during the Great Recession did not reduce inflation greatly: partly because inflation expectations were anchored, and partly because short‐term unemployment rose less sharply than total unemployment.