DOCSLIB.ORG

Wage and Price Adjustment in the Short Run (Chapter 9)

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Wage and Price Adjustment in the Short Run (Chapter 9) SGPE Summer School: Macroeconomics Lecture 9 Wage and price adjustment in the short run (Chapter 9) • In the IS-LM model, we assumed that prices were given in the short run • But prices are not constant. We need a theory for how wages and prices adjust in the short run • In the long run, production and employment should go back to the equilibrium levels found in Lectures 2 and 6 • Analysis of wage and price adjustment ties the short and the long run together 2 Wage and price adjustment: Introduction Questions: • What factors determine short run wage and price adjustment? • Is there a choice between low inflation and low unemployment? 3 Wage and price adjustment: The Phillips curve The wage-setting equation: d DW DW n If unemployment is lower (higher) t = t - b u - u W W ( t ) t-1 t-1 than the equilibrium level, companies want to raise wages more (less) than the average rate of wage growth 4 Wage and price adjustment: The Phillips curve Wage-setting in the short run: • Share 1 - l of companies set wages W r at the end of the previous year • Share l of companies that have flexible wages: W x • Average rate of wage increase in the economy: DW DW x DW r t = l t +(1- l) t Wt-1 Wt-1 Wt-1 Wage increase in firms Wage increase in firms that can adjust wages that can’t adjust wages during the period during the period 5 Wage and price adjustment: The Phillips curve • Wage-setting in companies that can adjust wages: DW x DW t = t - b u - un ( t ) these firms set their desired wage Wt-1 Wt-1 • Wage-setting in companies that cannot adjust wages: DW r DW e these firms set wages based on their t = t expectations about average wage W W t-1 t-1 development Intuition: If they were to set any other wage, they would be consciously setting the wrong wage! Those who are flexible set the wage correctly given the labour market situation 6 Wage and price adjustment: The Phillips curve Average rate of wage increase in the economy: DW DW x DW r éDW ù DW e t = l t + 1- l t = l t -b u -un + 1- l t ( ) ê ( t )ú ( ) Wt-1 Wt-1 Wt-1 ëWt-1 û Wt-1 DW DW e t (1- l) = (1- l) t - lb u - un ( t ) Wt-1 Wt-1 DW DW e lb t = t - u - un ( t ) Wt-1 Wt-1 1- l ˆ lb DW DW e where b = The Phillips curve t = t - bˆ u - un 1- l ( t ) Wt-1 Wt-1 7 Wage and price adjustment: The Phillips curve The Phillips curve: e lb DW DW n ˆ t = t - bˆ u - u where b = ( t ) 1- l Wt-1 Wt-1 8 Wage and price adjustment: The Phillips curve The slope of the Phillips curve is determined by: • The parameter b How much unemployment influences the company’s wage- setting decisions • The parameter l What percentage of companies can adjust wages freely If b and l are large, the Phillips curve has a steep slope and vice-versa 9 Wage and price adjustment: The Phillips curve P - P Definition of inflation: t t-1 p t = Pt-1 To analyse short run wage and price adjustment, we simplify the production function and set a = 0 : Y Y = EN Þ MPL = APL = = E N W W Price-setting: P = (1+ m)MC = (1+ m) = (1+m) MPL E DW DE Inflation: p = - W E DW e DEe Expected inflation: p e = - W E 10 Wage and price adjustment: The Phillips curve We can write the Phillips curve in terms of unemployment and price inflation: DW DE DW e DE p = - = -bˆ u -un - W E W ( ) E DEe DE æDE DEe ö p = p e + -bˆ(u -un ) - = p e -bˆ(u -un ) -ç - ÷ E E è E E ø Inflation is determined by: • expected inflation • unemployment • unexpected changes in productivity 11 Wage and price adjustment: The Phillips curve The Phillips curve in terms of unemployment and inflation: æ DE DEe ö p = p e - bˆ(u - un ) -ç - ÷ è E E ø To simplify, we write: p = p e - bˆ(u -un ) + z where z represents unexpected changes in productivity and also changes in cost or taxes that affect prices when wages have been set 12 Wage and price adjustment: The Phillips curve L - N • Definition, unemployment: u = L • Production function: Y = EN Y n = EN n L- N L- N n N - N n Y / E -Y n / E Y n Y -Y n • u - un = - = - = - = - L L L L EL Y n When production is above the natural level, unemployment is below the natural level Y -Y n • Definition, output gap: Yˆ = Y n Y n lb Y n • The Phillips curve: p = p e + b Y ˆ + z where b = bˆ = EL 1- l EL 13 Wage and price adjustment: The Phillips curve p = p e + bYˆ + z 14 Wage and price adjustment: The Phillips curve p = p e + bYˆ + z Inflation is determined by: • Expected inflation • Output gap • Unexpected shocks to productivity and non-wage costs such as energy prices 15 Wage and price adjustment: The Phillips curve Adjustment is probably slower for several reasons: • Many wage agreements are multi-year agreements • Those who set wages and prices have imperfect information about the economic situation and it takes time to react • Changes in wages and prices are not synchronised All these factors influence the speed of wage and price adjustment and hence the slope of the Phillips curve 16 Expectations: Introduction Question: The position of the Phillips curve depends on expected inflation, but how are expectations about inflation formed and what are the consequences for the relation between inflation and production/employment? 17 Expectations: Introduction Three cases: p e = 0 The price level is expected to be the same as last year e p t = pt-1 Inflation is expected to be the same as last year p e = p Ä Inflation is expected to equal the inflation target 18 Expectations: Price level the same (p e = 0) Phillips curve: p = bYˆ + z What happens if the money supply increases more quickly? The effect of increasing M will be higher inflation and higher production and employment. There is a trade-off between inflation and unemployment 19 e Expectations: Inflation the same (p = p-1) But if inflation is higher, people should realise that sooner or later. An alternative Phillips curve is ˆ p t = p t-1 + bYt + zt 20 Expectations: Inflation the same What happens if the money supply increases faster? ˆ p = p-1 + bY + z Phillips curve is not stable: when expectations have adjusted, the effect of a faster increase of M is higher inflation but no effect on unemployment 21 Expectations: Inflation the same p = p + bYˆ + z • Phillips curve: -1 p • Subtraction of - 1 yields Dp = bYˆ + z • If production is kept above the equilibrium level, inflation will accelerate and vice-versa • Equilibrium unemployment is sometimes called the non-accelerating-inflation rate of unemployment (NAIRU) • The vertical line at the equilibrium level of production (or unemployment rate) is sometimes called the long-run Phillips curve (LRPC) 22 Expectations: Inflation the same • In the long run there is no real choice between inflation and unemployment • It is costly to keep production above the natural level: the result will be permanently higher inflation • If inflation is high, it can be worthwhile to try to reduce it even if it is costly in terms of production and employment in the short run. The result is permanently lower inflation 23 Expectations: A strict and credible inflation target (p e = p Ä ) Phillips curve: p = p Ä + bYˆ + z What happens if the money supply increases faster? The effect of increased M is higher inflation and production. The Phillips curve is not affected as long as the target remains credible 24 Relation between economic activity and inflation 25 Relation between economic activity and inflation Why is there no clear relation – no stable Phillips curve? • When inflation has increased to a high level, it tends to remain high because expected inflation is higher • Equilibrium unemployment can change over time On the other hand there is a fairly strong relation between the output gap and the change in inflation, e which supports the Phillips curve with p = p-1 ˆ that is ˆ p = p-1 + bY + z Dp = bY + z 26 Relation between economic activity and inflation 27.
Load more

Recommended publications
  • Calculating the Output Gap
    ECONOMIC AND MONETARY DEVELOPMENTS AND PROSPECTS Appendix 2 Calculating the output gap The output gap is an important concept in the preparation of inflation forecasts and assessments of the economic outlook. However, the output gap is difficult to measure and subject to great uncertainty in practice. The techniques used by the Central Bank of Iceland and elsewhere to calculate the output gap, which have previously been described in Monetary Bulletin (2000/4 pp. 14-15), will be recapitulated here taking particular account of investments in the aluminium and power sectors, since these have a substantial impact on both the level of production and output potential in the economy, not only during the construction phase but also when the investments 1 have been completed. 2005•1 MONETARY BULLETIN Definition of the output gap The output gap is defined as the difference between actual and potential GDP as a per cent of potential GDP, i.e.: (1) P where GAPt is the output gap, Yt is GDP in real terms and Y t is the potential output of the economy, all during the year t. Potential output is defined as the level of GDP that is consistent with full utilisation of all factors of production under conditions of stable inflation. Thus potential output is determined on the supply side of the economy, i.e. by capital stock, labour use and available technology. Potential output in the long term is determined by how effici- ently the available factors of production can be utilised for a given level of productivity. In the short run, however, aggregate demand can drive the level of production beyond long-term potential output.
    [Show full text]
  • Output Gaps and Robust Monetary Policy Rules
    SVERIGES RIKSBANK WORKING PAPER SERIES 260 Output Gaps and Robust Monetary Policy Rules Roberto M. Billi MARCH 2012 WORKING PAPERS ARE OBTAINABLE FROM Sveriges Riksbank • Information Riksbank • SE-103 37 Stockholm Fax international: +46 8 787 05 26 Telephone international: +46 8 787 01 00 E-mail: [email protected] The Working Paper series presents reports on matters in the sphere of activities of the Riksbank that are considered to be of interest to a wider public. The papers are to be regarded as reports on ongoing studies and the authors will be pleased to receive comments. The views expressed in Working Papers are solely the responsibility of the authors and should not to be interpreted as reflecting the views of the Executive Board of Sveriges Riksbank. Output Gaps and Robust Monetary Policy Rules Roberto M. Billiy Sveriges Riksbank Working Paper Series No. 260 March 2012 Abstract Policymakers often use the output gap, a noisy signal of economic activity, as a guide for setting monetary policy. Noise in the data argues for policy caution. At the same time, the zero bound on nominal interest rates constrains the central bank’sability to stimulate the economy during downturns. In such an environment, greater policy stimulus may be needed to stabilize the economy. Thus, noisy data and the zero bound present policymakers with a dilemma in deciding the appropriate stance for monetary policy. I investigate this dilemma in a small New Keynesian model, and show that policymakers should pay more attention to output gaps than suggested by previous research. Keywords: output gap, measurement errors, monetary policy, zero lower bound JEL: E52, E58 I thank Tor Jacobson, Per Jansson, Ulf Söderström, David Vestin, Karl Walentin, and seminar participants at Sveriges Riksbank for helpful comments and discussions.
    [Show full text]
  • Mind the Output Gap: the Disconnect of Growth and Inflation During Recessions and Convex Phillips Curves in the Euro Area
    Working Paper Series Marco Gross, Willi Semmler Mind the output gap: the disconnect of growth and inflation during recessions and convex Phillips curves in the euro area Task force on low inflation (LIFT) No 2004 / January 2017 Disclaimer: This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. Task force on low inflation (LIFT) This paper presents research conducted within the Task Force on Low Inflation (LIFT). The task force is composed of economists from the European System of Central Banks (ESCB) - i.e. the 29 national central banks of the European Union (EU) and the European Central Bank. The objective of the expert team is to study issues raised by persistently low inflation from both empirical and theoretical modelling perspectives. The research is carried out in three workstreams: 1) Drivers of Low Inflation; 2) Inflation Expectations; 3) Macroeconomic Effects of Low Inflation. LIFT is chaired by Matteo Ciccarelli and Chiara Osbat (ECB). Workstream 1 is headed by Elena Bobeica and Marek Jarocinski (ECB) ; workstream 2 by Catherine Jardet (Banque de France) and Arnoud Stevens (National Bank of Belgium); workstream 3 by Caterina Mendicino (ECB), Sergio Santoro (Banca d’Italia) and Alessandro Notarpietro (Banca d’Italia). The selection and refereeing process for this paper was carried out by the Chairs of the Task Force. Papers were selected based on their quality and on the relevance of the research subject to the aim of the Task Force. The authors of the selected papers were invited to revise their paper to take into consideration feedback received during the preparatory work and the referee’s and Editors’ comments.
    [Show full text]
  • After the Phillips Curve: Persistence of High Inflation and High Unemployment
    Conference Series No. 19 BAILY BOSWORTH FAIR FRIEDMAN HELLIWELL KLEIN LUCAS-SARGENT MC NEES MODIGLIANI MOORE MORRIS POOLE SOLOW WACHTER-WACHTER % FEDERAL RESERVE BANK OF BOSTON AFTER THE PHILLIPS CURVE: PERSISTENCE OF HIGH INFLATION AND HIGH UNEMPLOYMENT Proceedings of a Conference Held at Edgartown, Massachusetts June 1978 Sponsored by THE FEDERAL RESERVE BANK OF BOSTON THE FEDERAL RESERVE BANK OF BOSTON CONFERENCE SERIES NO. 1 CONTROLLING MONETARY AGGREGATES JUNE, 1969 NO. 2 THE INTERNATIONAL ADJUSTMENT MECHANISM OCTOBER, 1969 NO. 3 FINANCING STATE and LOCAL GOVERNMENTS in the SEVENTIES JUNE, 1970 NO. 4 HOUSING and MONETARY POLICY OCTOBER, 1970 NO. 5 CONSUMER SPENDING and MONETARY POLICY: THE LINKAGES JUNE, 1971 NO. 6 CANADIAN-UNITED STATES FINANCIAL RELATIONSHIPS SEPTEMBER, 1971 NO. 7 FINANCING PUBLIC SCHOOLS JANUARY, 1972 NO. 8 POLICIES for a MORE COMPETITIVE FINANCIAL SYSTEM JUNE, 1972 NO. 9 CONTROLLING MONETARY AGGREGATES II: the IMPLEMENTATION SEPTEMBER, 1972 NO. 10 ISSUES .in FEDERAL DEBT MANAGEMENT JUNE 1973 NO. 11 CREDIT ALLOCATION TECHNIQUES and MONETARY POLICY SEPBEMBER 1973 NO. 12 INTERNATIONAL ASPECTS of STABILIZATION POLICIES JUNE 1974 NO. 13 THE ECONOMICS of a NATIONAL ELECTRONIC FUNDS TRANSFER SYSTEM OCTOBER 1974 NO. 14 NEW MORTGAGE DESIGNS for an INFLATIONARY ENVIRONMENT JANUARY 1975 NO. 15 NEW ENGLAND and the ENERGY CRISIS OCTOBER 1975 NO. 16 FUNDING PENSIONS: ISSUES and IMPLICATIONS for FINANCIAL MARKETS OCTOBER 1976 NO. 17 MINORITY BUSINESS DEVELOPMENT NOVEMBER, 1976 NO. 18 KEY ISSUES in INTERNATIONAL BANKING OCTOBER, 1977 CONTENTS Opening Remarks FRANK E. MORRIS 7 I. Documenting the Problem 9 Diagnosing the Problem of Inflation and Unemployment in the Western World GEOFFREY H.
    [Show full text]
  • Downward Nominal Wage Rigidities Bend the Phillips Curve
    FEDERAL RESERVE BANK OF SAN FRANCISCO WORKING PAPER SERIES Downward Nominal Wage Rigidities Bend the Phillips Curve Mary C. Daly Federal Reserve Bank of San Francisco Bart Hobijn Federal Reserve Bank of San Francisco, VU University Amsterdam and Tinbergen Institute January 2014 Working Paper 2013-08 http://www.frbsf.org/publications/economics/papers/2013/wp2013-08.pdf The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Federal Reserve Bank of San Francisco or the Board of Governors of the Federal Reserve System. Downward Nominal Wage Rigidities Bend the Phillips Curve MARY C. DALY BART HOBIJN 1 FEDERAL RESERVE BANK OF SAN FRANCISCO FEDERAL RESERVE BANK OF SAN FRANCISCO VU UNIVERSITY AMSTERDAM, AND TINBERGEN INSTITUTE January 11, 2014. 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. Keywords: Downward nominal wage rigidities, monetary policy, Phillips curve. JEL-codes: E52, E24, J3. 1 We are grateful to Mike Elsby, Sylvain Leduc, Zheng Liu, and Glenn Rudebusch, as well as seminar participants at EIEF, the London School of Economics, Norges Bank, UC Santa Cruz, and the University of Edinburgh for their suggestions and comments.
    [Show full text]
  • Karl Marx's Thoughts on Functional Income Distribution - a Critical Analysis
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Herr, Hansjörg Working Paper Karl Marx's thoughts on functional income distribution - a critical analysis Working Paper, No. 101/2018 Provided in Cooperation with: Berlin Institute for International Political Economy (IPE) Suggested Citation: Herr, Hansjörg (2018) : Karl Marx's thoughts on functional income distribution - a critical analysis, Working Paper, No. 101/2018, Hochschule für Wirtschaft und Recht Berlin, Institute for International Political Economy (IPE), Berlin This Version is available at: http://hdl.handle.net/10419/175885 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Institute for International Political Economy Berlin Karl Marx’s thoughts on functional income distribution – a critical analysis Author: Hansjörg Herr Working Paper, No.
    [Show full text]
  • Measuring Potential Output and Output Gap and Macroeconomic Policy: the Ac Se of Kenya Angelica E
    University of Connecticut OpenCommons@UConn Economics Working Papers Department of Economics October 2005 Measuring Potential Output and Output Gap and Macroeconomic Policy: The aC se of Kenya Angelica E. Njuguna Kenyatta University and KIPPRA Stephen N. Karingi United Nations Economic Commission for Africa Mwangi S. Kimenyi University of Connecticut Follow this and additional works at: https://opencommons.uconn.edu/econ_wpapers Recommended Citation Njuguna, Angelica E.; Karingi, Stephen N.; and Kimenyi, Mwangi S., "Measuring Potential Output and Output Gap and Macroeconomic Policy: The asC e of Kenya" (2005). Economics Working Papers. 200545. https://opencommons.uconn.edu/econ_wpapers/200545 Department of Economics Working Paper Series Measuring Potential Output and Output Gap and Macroeco- nomic Policy: The Case of Kenya Angelica E. Njuguna Kenyatta University and KIPPRA Stephen N. Karingi United Nations Economic Commission for Africa Mwangi S. Kimenyi University of Connecticut Working Paper 2005-45 October 2005 341 Mansfield Road, Unit 1063 Storrs, CT 06269–1063 Phone: (860) 486–3022 Fax: (860) 486–4463 http://www.econ.uconn.edu/ This working paper is indexed on RePEc, http://repec.org/ Abstract Measuring the level of an economy.s potential output and output gap are essen- tial in identifying a sustainable non-inflationary growth and assessing appropriate macroeconomic policies. The estimation of potential output helps to determine the pace of sustainable growth while output gap estimates provide a key bench- mark against which to assess inflationary or disinflationary pressures suggesting when to tighten or ease monetary policies. These measures also help to provide a gauge in the determining the structural fiscal position of the government.
    [Show full text]
  • Working Paper No. 563 Whither New Consensus Macroeconomics? the Role of Government and Fiscal Policy in Modern Macroeconomics
    Working Paper No. 563 Whither New Consensus Macroeconomics? The Role of Government and Fiscal Policy in Modern Macroeconomics by Giuseppe Fontana* May 2009 * University of Leeds (UK) and Università del Sannio (Benevento, Italy). Correspondence address: Economics, LUBS, University of Leeds, Leeds LS2 9JT, UK. E-mail: [email protected]; tel.: +44 (0) 113 343 4503; fax: +44 (0) 113 343 4465. The Levy Economics Institute Working Paper Collection presents research in progress by Levy Institute scholars and conference participants. The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals. The Levy Economics Institute of Bard College, founded in 1986, is a nonprofit, nonpartisan, independently funded research organization devoted to public service. Through scholarship and economic research it generates viable, effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad. The Levy Economics Institute P.O. Box 5000 Annandale-on-Hudson, NY 12504-5000 http://www.levy.org Copyright © The Levy Economics Institute 2009 All rights reserved. ABSTRACT In the face of the dramatic economic events of recent months and the inability of academics and policymakers to prevent them, the New Consensus Macroeconomics (NCM) model has been the subject of several criticisms. This paper considers one of the main criticisms lodged against the NCM model, namely, the absence of any essential role for the government and fiscal policy. Given the size of the public sector and the increasing role of fiscal policy in modern economies, this simplifying assumption of the NCM model is difficult to defend.
    [Show full text]
  • The Return of the Wage Phillips Curve
    THE RETURN OF THE WAGE PHILLIPS CURVE Jordi Gal´ı CREI, Universitat Pompeu Fabra and Barcelona GSE Abstract The standard New Keynesian model with staggered wage setting is shown to imply a simple dynamic relation between wage inflation and unemployment. Under some assumptions, that relation takes a form similar to that found in empirical wage equations—starting from Phillips’ (1958) original work—and may thus be viewed as providing some theoretical foundations to the latter. The structural wage equation derived here is shown to account reasonably well for the comovement of wage inflation and the unemployment rate in the US economy, even under the strong assumption of a constant natural rate of unemployment. (JEL: E24, E31, E32) 1. Introduction The past decade has witnessed the emergence of a new popular framework for monetary policy analysis, the so-called New Keynesian (NK) model. The new framework combines some of the ingredients of Real Business Cycle theory (for example dynamic optimization, general equilibrium) with others that have a distinctive Keynesian flavor (for example monopolistic competition, nominal rigidities). Many important properties of the NK model hinge on the specification of its wage- setting block. While basic versions of that model, intended for classroom exposition, assume fully flexible wages and perfect competition in labor markets, the larger, more realistic versions (including those developed in-house at different central banks and policy institutions) typically assume staggered nominal wage setting which, following the lead of Erceg, Henderson, and Levin (2000), are modeled in a way symmetric to The editor in charge of this paper was Fabrizio Zilibotti.
    [Show full text]
  • Deflation: Economic Significance, Current Risk, and Policy Responses
    Deflation: Economic Significance, Current Risk, and Policy Responses Craig K. Elwell Specialist in Macroeconomic Policy August 30, 2010 Congressional Research Service 7-5700 www.crs.gov R40512 CRS Report for Congress Prepared for Members and Committees of Congress Deflation: Economic Significance, Current Risk, and Policy Responses Summary Despite the severity of the recent financial crisis and recession, the U.S. economy has so far avoided falling into a deflationary spiral. Since mid-2009, the economy has been on a path of economic recovery. However, the pace of economic growth during the recovery has been relatively slow, and major economic weaknesses persist. In this economic environment, the risk of deflation remains significant and could delay sustained economic recovery. Deflation is a persistent decline in the overall level of prices. It is not unusual for prices to fall in a particular sector because of rising productivity, falling costs, or weak demand relative to the wider economy. In contrast, deflation occurs when price declines are so widespread and sustained that they cause a broad-based price index, such as the Consumer Price Index (CPI), to decline for several quarters. Such a continuous decline in the price level is more troublesome, because in a weak or contracting economy it can lead to a damaging self-reinforcing downward spiral of prices and economic activity. However, there are also examples of relatively benign deflations when economic activity expanded despite a falling price level. For instance, from 1880 through 1896, the U.S. price level fell about 30%, but this coincided with a period of strong economic growth.
    [Show full text]
  • Recovering Keynesian Phillips Curve Theory: Hysteresis of Ideas and the Natural Rate of Unemployment
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Palley, Thomas Working Paper Recovering Keynesian Phillips Curve Theory: Hysteresis of Ideas and the Natural Rate of Unemployment FMM Working Paper, No. 26 Provided in Cooperation with: Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation Suggested Citation: Palley, Thomas (2018) : Recovering Keynesian Phillips Curve Theory: Hysteresis of Ideas and the Natural Rate of Unemployment, FMM Working Paper, No. 26, Hans-Böckler-Stiftung, Macroeconomic Policy Institute (IMK), Forum for Macroeconomics and Macroeconomic Policies (FFM), Düsseldorf This Version is available at: http://hdl.handle.net/10419/181484 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu FMM WORKING PAPER No. 26 · June, 2018 · Hans-Böckler-Stiftung RECOVERING KEYNESIAN PHILLIPS CURVE THEORY: HYSTERESIS OF IDEAS AND THE NATURAL RATE OF UNEMPLOYMENT Thomas Palley* ABSTRACT Economic theory is prone to hysteresis.
    [Show full text]
  • The Phillips Curve and U.S. Macroeconomic Policy: Snapshots, 1958-1996
    Economic Quarterly—Volume 94, Number 4—Fall 2008—Pages 311–359 The Phillips Curve and U.S. Macroeconomic Policy: Snapshots, 1958–1996 Robert G. King he curve first drawn by A.W. Phillips in 1958, highlighting a negative relationship between wage inflation and unemployment, figured T prominently in the theory and practice of macroeconomic policy during 1958–1996. Within a decade of Phillips’ analysis, the idea of a relatively stable long- run tradeoff between price inflation and unemployment was firmly built into policy analysis in the United States and other countries. Such a long-run tradeoff was at the core of most prominent macroeconometric models as of 1969. Over the ensuing decade, the United States and other countries experi- enced stagflation, a simultaneous rise of unemployment and inflation, which threw the consensus about the long-run Phillips curve into disarray. By the end of the 1970s, inflation was historically high—near 10 percent—and poised to rise further. Economists and policymakers stressed the role of shifting ex- pectations of inflation and differed widely on the costliness of reducing infla- tion, in part based on alternative views of the manner in which expectations were formed. In the early 1980s, the Federal Reserve System undertook an unwinding of inflation, producing a multiyear interval in which inflation fell substantially and permanently while unemployment rose substantially but temporarily. Although costly, the disinflation process involved lower unem- ployment losses than predicted by consensus macroeconomists, as rational expectations analysts had suggested that it would. The author is affiliated with Boston University, National Bureau of Economic Research, and the Federal Reserve Bank of Richmond.
    [Show full text]