Philips Curves and Inflation Flashcards
Outline the trend of inflation and Philips curves from the 60s onwards.
1960s: consistent rise in inflation
1970s: high and variable inflation
1980s: slowdown and convergence of inflation rates. Lower, flatter and more stable Philips curves.
1990s to 2008: non-inflationary growth in US and UK.
Outline the trend of inflation and Philips curves from the 60s onwards.
1960s: consistent rise in inflation
1970s: high and variable inflation
1980s: slowdown and convergence of inflation rates. Lower, flatter and more stable Philips curves.
1990s to 2008: non-inflationary growth in US and UK due to more credible monetary policy, globalization and positive shocks.
2008 onwards: persistently low inflation. PC and inflation dead or dormant.
What does the Philips curve show?
The negative relationship between unemployment and inflation.
Outline the wage price signal.
Lower U, leads to higher wages.
Higher wages, firms increases prices.
Workers ask for higher wage.
Higher wages lead to firms increasing prices.
Race continues over wages and price inflation.
Friedman and Phelps (1960s) Arguments against the Philips curve.
PCs implies a permanent trade off between inflation and unemployment.
Argued that U could not be sustained below a certain level, NAIRU.
Capital Economics.
Flattening in PC 1970s to current
Rise of technology and diminishing power of labour unions.
From 1970s onwards PC has continuously flattered.
Ball and Mazumder (2018)
Study indicates anchoring of actual inflation to long term expected inflation.
Past inflation rates on long term expected inflation based of coefficient beta.
Decrease in slope of Pc, flatter.
Import prices, globalization. Fall in NAIRU over time.
What are the possible effects of globalization on NAIRU?
Most research in terms of closed economy.
With increasing globalization (trade and capital) empirical research shoes inflation has been decreasing over time across all countries.
William Dudley: President of New York FED
Monetary Policies
“Industrialized nations benefits from disinflation in manufactured goods produced in EMEs”.
Bean (2006): globalization and the Philips curve
Very good monetary policy targeting have resulted in a flatter Philips curve and lower inflation.
Possible other mechanisms to explain trends in inflation
Increased product market competition reduced the price mark up in the NAIRU model.
Workers perceive in competition with lower wage workers overseas, lower wages.
Labour market reform.
Positive terms of trade effect.
Forbes (2019) - extends modelling of inflation in include globalization variables.
Relative flattening of PC, weakening of inflation and domestic output but PC has not disappeared.
Variation between countries, mainly reflecting exposure to Globalization.
Some evidence of increased role of global factors on inflation.
Global factors only party explain puzzle of post crisis inflation performance.
Outline the trends of inflation and the GFC.
Consistent flatter PC.
Low inflation, firms change prices infrequently, evidence of downward nominal rigidity.
Initial loose monetary policy cushioned fall in inflation.
Bell and Blanchflower: GFC and Inflation
Unemployment mismeasurment, falling NAIRU and remaining slack.
Evidence of underemployment , people working reduced hours involuntarily.
Outline the key wage and inflation puzzles
Fall in employment led to limited wage growth and inflation.
Inflation below target, PC flat.
