Further Thoughts On Phillips Curves

In a observes that recent observations facial expression similar a Phillips flexure without whatever expected inflation term at all. He mentions diverse possible explanations for this, but of those the most obvious to me is that expectations possess got larn anchored because of inflation targeting. This was 1 of the cases I considered inwards my before post: that agents ever believed inflation would render to target adjacent year. So inwards that feel Paul together with I are talking virtually the same evidence.

Before discussing interpretation further, allow me select inwards a paper yesteryear Ball together with Mazumder. This appears to come upward to completely the contrary decision to mine. They tell “we present that the Great Recession provides fresh show against the New Keynesian Phillips flexure amongst rational expectations”. I create non wishing to beak over the specific department of their newspaper where they depict that conclusion, because it involves exactly the form of specification uncertainties that Mavroeidis et al discuss. Instead I volition but authorities annotation that the Ball together with Mazumder study had information upward to 2010. We similar a shot possess got information upward to 2013. In its most basic form, the competitor betwixt the 2 Phillips curves is whether underlying inflation is similar a shot higher or lower than inwards 2009 (see maths below). It is higher. So to rescue the adaptive expectations view, you lot possess got to debate that underlying inflation is genuinely lower similar a shot than inwards 2009. Maybe it is possible to create that, but I possess got non seen that done.

However it would move a large fault to mean value that the Ball together with Mazumder newspaper finds back upward for the adaptive expectations Friedman/Phelps Phillips curve. They every bit good break clear show that expectations possess got larn to a greater extent than together with to a greater extent than anchored. So inwards this feel the show is all pointing inwards the same way.

So I suspect the principal differences hither come upward from interpretation. I’m happy to translate anchoring every bit agents acting rationally every bit inflation targets possess got larn established together with credible, although I also concord that it is non the alone possible interpretation (see Thomas Palley together with post from a few days agone I looked at unopen to recent show on Phillips curves, treating the Great Recession every bit a exam case. I cast the news every bit a debate betwixt rational together with adaptive expectations. Neither is probable to move 100% correct of course, but I suggested the show implied rational expectations were to a greater extent than correct than adaptive. In this post I wishing to relate this to another people’s move together with discussion. (See also this observes that recent observations facial expression similar a Phillips flexure without whatever expected inflation term at all. He mentions diverse possible explanations for this, but of those the most obvious to me is that expectations possess got larn anchored because of inflation targeting. This was 1 of the cases I considered inwards my before post: that agents ever believed inflation would render to target adjacent year. So inwards that feel Paul together with I are talking virtually the same evidence.

Before discussing interpretation further, allow me select inwards a paper yesteryear Ball together with Mazumder. This appears to come upward to completely the contrary decision to mine. They tell “we present that the Great Recession provides fresh show against the New Keynesian Phillips flexure amongst rational expectations”. I create non wishing to beak over the specific department of their newspaper where they depict that conclusion, because it involves exactly the form of specification uncertainties that Mavroeidis et al discuss. Instead I volition but authorities annotation that the Ball together with Mazumder study had information upward to 2010. We similar a shot possess got information upward to 2013. In its most basic form, the competitor betwixt the 2 Phillips curves is whether underlying inflation is similar a shot higher or lower than inwards 2009 (see maths below). It is higher. So to rescue the adaptive expectations view, you lot possess got to debate that underlying inflation is genuinely lower similar a shot than inwards 2009. Maybe it is possible to create that, but I possess got non seen that done.

However it would move a large fault to mean value that the Ball together with Mazumder newspaper finds back upward for the adaptive expectations Friedman/Phelps Phillips curve. They every bit good break clear show that expectations possess got larn to a greater extent than together with to a greater extent than anchored. So inwards this feel the show is all pointing inwards the same way.

So I suspect the principal differences hither come upward from interpretation. I’m happy to translate anchoring every bit agents acting rationally every bit inflation targets possess got larn established together with credible, although I also concord that it is non the alone possible interpretation (see Thomas Palley together with post from Mark Thoma.)

The get-go number is why facial expression at exactly one-half a dozen years, inwards alone a few countries. As I noted inwards the master copy post, when looking at CPI inflation in that place are many curt term factors that may mislead. Another argue for excluding European countries which I did non shout is the deport upon of austerity driven higher VAT rates (and other similar taxes or administered prices), nicely observes that recent observations facial expression similar a Phillips flexure without whatever expected inflation term at all. He mentions diverse possible explanations for this, but of those the most obvious to me is that expectations possess got larn anchored because of inflation targeting. This was 1 of the cases I considered inwards my before post: that agents ever believed inflation would render to target adjacent year. So inwards that feel Paul together with I are talking virtually the same evidence.

Before discussing interpretation further, allow me select inwards a paper yesteryear Ball together with Mazumder. This appears to come upward to completely the contrary decision to mine. They tell “we present that the Great Recession provides fresh show against the New Keynesian Phillips flexure amongst rational expectations”. I create non wishing to beak over the specific department of their newspaper where they depict that conclusion, because it involves exactly the form of specification uncertainties that Mavroeidis et al discuss. Instead I volition but authorities annotation that the Ball together with Mazumder study had information upward to 2010. We similar a shot possess got information upward to 2013. In its most basic form, the competitor betwixt the 2 Phillips curves is whether underlying inflation is similar a shot higher or lower than inwards 2009 (see maths below). It is higher. So to rescue the adaptive expectations view, you lot possess got to debate that underlying inflation is genuinely lower similar a shot than inwards 2009. Maybe it is possible to create that, but I possess got non seen that done.

However it would move a large fault to mean value that the Ball together with Mazumder newspaper finds back upward for the adaptive expectations Friedman/Phelps Phillips curve. They every bit good break clear show that expectations possess got larn to a greater extent than together with to a greater extent than anchored. So inwards this feel the show is all pointing inwards the same way.

So I suspect the principal differences hither come upward from interpretation. I’m happy to translate anchoring every bit agents acting rationally every bit inflation targets possess got larn established together with credible, although I also concord that it is non the alone possible interpretation (see Thomas Palley together with documented yesteryear Klitgaard together with Peck. Surely all this ‘noise’ is an first-class argue to facial expression over a much longer fourth dimension horizon?

One respond is given inwards this recent JEL paper yesteryear Mavroeidis, Plagborg-Møller together with Stock. As Plagborg-Moller observes that recent observations facial expression similar a Phillips flexure without whatever expected inflation term at all. He mentions diverse possible explanations for this, but of those the most obvious to me is that expectations possess got larn anchored because of inflation targeting. This was 1 of the cases I considered inwards my before post: that agents ever believed inflation would render to target adjacent year. So inwards that feel Paul together with I are talking virtually the same evidence.

Before discussing interpretation further, allow me select inwards a paper yesteryear Ball together with Mazumder. This appears to come upward to completely the contrary decision to mine. They tell “we present that the Great Recession provides fresh show against the New Keynesian Phillips flexure amongst rational expectations”. I create non wishing to beak over the specific department of their newspaper where they depict that conclusion, because it involves exactly the form of specification uncertainties that Mavroeidis et al discuss. Instead I volition but authorities annotation that the Ball together with Mazumder study had information upward to 2010. We similar a shot possess got information upward to 2013. In its most basic form, the competitor betwixt the 2 Phillips curves is whether underlying inflation is similar a shot higher or lower than inwards 2009 (see maths below). It is higher. So to rescue the adaptive expectations view, you lot possess got to debate that underlying inflation is genuinely lower similar a shot than inwards 2009. Maybe it is possible to create that, but I possess got non seen that done.

However it would move a large fault to mean value that the Ball together with Mazumder newspaper finds back upward for the adaptive expectations Friedman/Phelps Phillips curve. They every bit good break clear show that expectations possess got larn to a greater extent than together with to a greater extent than anchored. So inwards this feel the show is all pointing inwards the same way.

So I suspect the principal differences hither come upward from interpretation. I’m happy to translate anchoring every bit agents acting rationally every bit inflation targets possess got larn established together with credible, although I also concord that it is non the alone possible interpretation (see Thomas Palley together with notes inwards an e-mail to Mark Thoma: “Our meta-analysis finds that essentially whatever desired parameter estimates tin terminate move generated yesteryear unopen to reasonable-sounding specification. That is, estimation of the NKPC is champaign of study to enormous specification uncertainty. This is consistent amongst the hit of estimates reported inwards the literature….traditional aggregate fourth dimension serial analysis is exactly non real informative virtually the nature of inflation dynamics.” This had been my reading based on move I’d seen.

This is ofttimes going to move the example amongst fourth dimension serial econometrics, especially when primal variables appear inwards the cast of expectations. Faced amongst this, what economists ofttimes facial expression for is unopen to decisive together with hopefully large event, where all the issues involving specification dubiousness tin terminate move sidelined or larn instant order. The Great Recession, for countries that did non endure a instant recession, powerfulness move exactly such an event. In earlier, milder recessions it was also much less clear what the monetary authority’s inflation target was (if it had 1 at all), together with how credible it was.

How does what I did relate to recent discussions yesteryear Paul Krugman? Paul observes that recent observations facial expression similar a Phillips flexure without whatever expected inflation term at all. He mentions diverse possible explanations for this, but of those the most obvious to me is that expectations possess got larn anchored because of inflation targeting. This was 1 of the cases I considered inwards my before post: that agents ever believed inflation would render to target adjacent year. So inwards that feel Paul together with I are talking virtually the same evidence.

Before discussing interpretation further, allow me select inwards a paper yesteryear Ball together with Mazumder. This appears to come upward to completely the contrary decision to mine. They tell “we present that the Great Recession provides fresh show against the New Keynesian Phillips flexure amongst rational expectations”. I create non wishing to beak over the specific department of their newspaper where they depict that conclusion, because it involves exactly the form of specification uncertainties that Mavroeidis et al discuss. Instead I volition but authorities annotation that the Ball together with Mazumder study had information upward to 2010. We similar a shot possess got information upward to 2013. In its most basic form, the competitor betwixt the 2 Phillips curves is whether underlying inflation is similar a shot higher or lower than inwards 2009 (see maths below). It is higher. So to rescue the adaptive expectations view, you lot possess got to debate that underlying inflation is genuinely lower similar a shot than inwards 2009. Maybe it is possible to create that, but I possess got non seen that done.

However it would move a large fault to mean value that the Ball together with Mazumder newspaper finds back upward for the adaptive expectations Friedman/Phelps Phillips curve. They every bit good break clear show that expectations possess got larn to a greater extent than together with to a greater extent than anchored. So inwards this feel the show is all pointing inwards the same way.

So I suspect the principal differences hither come upward from interpretation. I’m happy to translate anchoring every bit agents acting rationally every bit inflation targets possess got larn established together with credible, although I also concord that it is non the alone possible interpretation (see Thomas Palley together with this paper inwards particular). My interpretation suggests that the New Keynesian Phillips flexure is a to a greater extent than sensible house to start from than the adaptive expectations Friedman/Phelps version. As this is the persuasion implicitly taken yesteryear most mainstream academic macroeconomics, but using a methodology that does non ensure congruence amongst the data, I mean value it is useful to betoken out when the mainstream does possess got empirical support.

Some maths

Suppose the Phillips flexure has the next form:

p(t) = E[p(t+1)] + a.y(t) + u(t)

where ‘p’ is inflation, E[..] is the expectations operator, ‘a’ is a positive parameter on the output gap ‘y’, together with ‘u’ is an error term. We possess got 2 references cases:

Static expectations: E[p(t+1)] = p(t-1)

Rational expectations: E[p(t+1)] = p(t+1) + e(t+1)

where ‘e’ is the error on expectations of hereafter inflation together with is random. Some elementary maths shows that nether static expectations, negative output gaps are associated amongst falling inflation, acre nether rational expectations they are associated amongst ascent inflation. If nosotros concord that betwixt 2009 together with today nosotros possess got had a serial of negative output gaps, nosotros exactly remove to inquire whether underlying inflation is similar a shot higher or lower than inwards 2009.