Optimal inflation and the identification of the Phillips curve

From a new VOX post by Michael McLeay and Silvana Tenreyro:

“We have long known that the empirical Phillips curve may vary with monetary policy (Lucas 1976). One common explanation for the Great Inflation of the 1970s is that policymakers mistakenly tried to exploit the prevailing reduced-form Phillips curve, and in so doing caused it to disappear (e.g. Sargent et al. 2006). In contrast, our point is that a disappearing Phillips curve is also a natural consequence of good monetary policy. If the true model of the economy involves a Phillips curve relationship, monetary policymakers aware of its existence should ensure it remains elusive in the data.”

Posted by at 1:13 PM

Labels: Macro Demystified


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