Current perspectives on the Phillips curve, a core macroeconomic concept that treats the relationship between inflation and unemployment. In 1958, economist A. W. Phillips published an article describing what he observed to be the inverse relationship between inflation and unemployment; subsequently, the “Phillips curve” became a central concept in macroeconomic analysis and policymaking. But today's Phillips curve is not the same as the original one from fifty years ago; the economy, our understanding of price setting behavior, the determinants of inflation, and the role of monetary policy have evolved significantly since then. In this book, some of the top economists working today reexamine the theoretical and empirical validity of the Phillips curve in its more recent specifications. The contributors consider such questions as what economists have learned about price and wage setting and inflation expectations that would improve the way we use and formulate the Phillips curve, what the Phillips curve approach can teach us about inflation dynamics, and how these lessons can be applied to improving the conduct of monetary policy. Contributors Lawrence Ball, Ben Bernanke, Oliver Blanchard, V. V. Chari, William T. Dickens, Stanley Fischer, Jeff Fuhrer, Jordi Gali, Michael T. Kiley, Robert G. King, Donald L. Kohn, Yolanda K. Kodrzycki, Jane Sneddon Little, Bartisz Mackowiak, N. Gregory Mankiw, Virgiliu Midrigan, Giovanni P. Olivei, Athanasios Orphanides, Adrian R. Pagan, Christopher A. Pissarides, Lucrezia Reichlin, Paul A. Samuelson, Christopher A. Sims, Frank R. Smets, Robert M. Solow, Jürgen Stark, James H. Stock, Lars E. O. Svensson, John B. Taylor, Mark W. Watson

Inflation is regarded by the many as a menace that damages business and can only make life worse for households. Keeping it low depends critically on ensuring that firms and workers expect it to be low. So expectations of inflation are a key influence on national economic welfare. This collection pulls together a galaxy of world experts (including Roy Batchelor, Richard Curtin and Staffan Linden) on inflation expectations to debate different aspects of the issues involved. The main focus of the volume is on likely inflation developments. A number of factors have led practitioners and academic observers of monetary policy to place increasing emphasis recently on inflation expectations. One is the spread of inflation targeting, invented in New Zealand over 15 years ago, but now encompassing many important economies including Brazil, Canada, Israel and Great Britain. Even more significantly, the European Central Bank, the Bank of Japan and the United States Federal Bank are the leading members of another group of monetary institutions all considering or implementing moves in the same direction. A second is the large reduction in actual inflation that has been observed in most countries over the past decade or so. These considerations underscore the critical – and largely underrecognized - importance of inflation expectations. They emphasize the importance of the issues, and the great need for a volume that offers a clear, systematic treatment of them. This book, under the steely editorship of Peter Sinclair, should prove very important for policy makers and monetary economists alike.

What monetary policy framework, if adopted by the Federal Reserve, would have avoided the Great Inflation of the 1960s and 1970s? The authors use counterfactual simulations of an estimated model of the U.S. economy to evaluate alternative monetary policy strategies. The authors document that policymakers at the time both had an overly optimistic view of the natural rate of unemployment and put a high priority on achieving full employment. They show that in the presence of realistic informational imperfections and with an emphasis on stabilizing economic activity, an optimal control approach would have failed to keep inflation expectations well anchored, resulting in highly volatile inflation during the 1970s. Charts and tables.

This paper examines the recent behavior of core inflation in the United States. We specify a simple Phillips curve based on the assumptions that inflation expectations are fully anchored at the Federal Reserve’s target, and that labor-market slack is captured by the level of shortterm unemployment. This equation explains inflation behavior since 2000, including the failure of high total unemployment since 2008 to reduce inflation greatly. The fit of our equation is especially good when we measure core inflation with the Cleveland Fed’s series on weighted median inflation. We also propose a more general Phillips curve in which core inflation depends on short-term unemployment and on expected inflation as measured by the Survey of Professional Forecasters. This specification fits U.S. inflation since 1985, including both the anchored-expectations period of the 2000s and the preceding period when expectations were determined by past levels of inflation.

Controlling inflation is among the most important objectives of economic policy. By maintaining price stability, policy makers are able to reduce uncertainty, improve price-monitoring mechanisms, and facilitate more efficient planning and allocation of resources, thereby raising productivity. This volume focuses on understanding the causes of the Great Inflation of the 1970s and ’80s, which saw rising inflation in many nations, and which propelled interest rates across the developing world into the double digits. In the decades since, the immediate cause of the period’s rise in inflation has been the subject of considerable debate. Among the areas of contention are the role of monetary policy in driving inflation and the implications this had both for policy design and for evaluating the performance of those who set the policy. Here, contributors map monetary policy from the 1960s to the present, shedding light on the ways in which the lessons of the Great Inflation were absorbed and applied to today’s global and increasingly complex economic environment.