Flattening of the Phillips Curve: Implications for Monetary Policy

2007 ◽  
Author(s):  
Dora Iakova
Keyword(s):  
Monetary Policy ◽  
Phillips Curve

scholarly journals The Unpleasant Arithmetic of the Taylor Rule

2020 ◽  
Vol 8 (3) ◽  
pp. p89
Author(s):  
Alejandro Rodriguez-Arana
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Phillips Curve ◽  
Taylor Rule ◽  
Independent Component ◽  
Elasticity Of Substitution ◽  
Interest Rate Rule

This paper analyzes the effect of a monetary policy that raises the reference interest rate in order to reduce inflation in a situation where the fiscal policy parameters remain constant. In an overlapping generation’s model and in the presence of an accelerationist Phillips curve and a Taylor rule of interest rates, it is observed that increasing the independent component of said rule leads to a solution that at least in a large number of cases is unstable. In the case where the elasticity of substitution is greater than one, inflation falls temporarily, but then it can increase in an unstable manner. One way to achieve stability is to establish an interest rate rule where Taylor’s principle is not met. However, in this case many times the increase in the independent component of this rule will generate greater long-term inflation.

ROBUST POLICIES IN A STICKY INFORMATION ECONOMY

2010 ◽  
Vol 14 (3) ◽  
pp. 311-342 ◽  
Author(s):  
Francesco Giuli
Keyword(s):  
Monetary Policy ◽  
Phillips Curve ◽  
Rational Expectation ◽  
Policy Instrument ◽  
Optimal Monetary Policy ◽  
Information Economy ◽  
Sticky Information ◽  
Productivity Shocks ◽  
Expectation Model ◽  
Short Run

This paper analyzes the behavior of a central bank under strong (“Knightian”) uncertainty when the short-run trade-off between output and inflation is represented by the sticky information Phillips curve proposed by Mankiw and Reis [Quarterly Journal of Economics 117(4), 1295–1328 (2002)]. By solving the robust control problem analytically, we show why model uncertainty does not affect the optimal monetary policy response to demand and productivity shocks, whereas it causes a stronger reaction of the monetary policy instrument to a cost-push (i.e., markup) shock. Differently from what occurs in sticky price models, the antiattenuation effect can result in a degree of price level stabilization that is greater or less than that experienced in the rational expectation model, depending on the central bank's degree of conservatism. These results dramatically affect the rationale for delegating monetary policy to a central banker more conservative than the society.

scholarly journals Can Agents with Causal Misperceptions be Systematically Fooled?

2019 ◽  
Vol 18 (2) ◽  
pp. 583-617 ◽  
Author(s):  
Ran Spiegler
Keyword(s):  
Monetary Policy ◽  
Bayesian Networks ◽  
Directed Acyclic Graph ◽  
Phillips Curve ◽  
Causal Model ◽  
Expected Value ◽  
Prediction Errors ◽  
Acyclic Graph ◽  
Long Run ◽  
Individual Variables

Abstract An agent forms estimates (or forecasts) of individual variables conditional on some observed signal. His estimates are based on fitting a subjective causal model—formalized as a directed acyclic graph, following the “Bayesian networks” literature—to objective long-run data. I show that the agent’s average estimates coincide with the variables’ true expected value (for any underlying objective distribution) if and only if the agent’s graph is perfect—that is, it directly links every pair of variables that it perceives as causes of some third variable. This result identifies neglect of direct correlation between perceived causes as the kind of causal misperception that can generate systematic prediction errors. I demonstrate the relevance of this result for economic applications: speculative trade, manipulation of a firm’s reputation, and a stylized “monetary policy” example in which the inflation-output relation obeys an expectational Phillips Curve.

scholarly journals The Phillips Curve: Back to the '60s?

2016 ◽  
Vol 106 (5) ◽  
pp. 31-34 ◽  
Author(s):  
Olivier Blanchard
Keyword(s):  
Monetary Policy ◽  
Standard Error ◽  
Phillips Curve ◽  
Inflation Expectations ◽  
Low Level ◽  
The Past ◽  
The U.S

This paper reexamines the behavior of inflation and unemployment and reaches four conclusions: 1) The U.S. Phillips curve is alive and well (at least as well as in the past). 2) Inflation expectations however have become steadily more anchored. 3) The slope of the curve has substantially declined. But the decline dates back to the 1980s rather than to the crisis. 4) The standard error of the residual in the relation is large, especially in comparison to the low level of inflation. Each of the four conclusions presents challenges for the conduct of monetary policy.

PARAMETER UNCERTAINTY AND NONLINEAR MONETARY POLICY RULES

2010 ◽  
Vol 15 (2) ◽  
pp. 184-200 ◽  
Author(s):  
Peter Tillmann
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Central Bank ◽  
Empirical Evidence ◽  
Parameter Uncertainty ◽  
Phillips Curve ◽  
Optimal Monetary Policy ◽  
Worst Case ◽  
Rate Adjustment ◽  
The Interest Rate

Empirical evidence suggests that the instrument rule describing the interest rate–setting behavior of the Federal Reserve is nonlinear. This paper shows that optimal monetary policy under parameter uncertainty can motivate this pattern. If the central bank is uncertain about the slope of the Phillips curve and follows a min–max strategy to formulate policy, the interest rate reacts more strongly to inflation when inflation is further away from target. The reason is that the worst case the central bank takes into account is endogenous and depends on the inflation rate and the output gap. As inflation increases, the worst-case perception of the Phillips curve slope becomes larger, thus requiring a stronger interest rate adjustment. Empirical evidence supports this form of nonlinearity for post-1982 U.S. data.

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