The Phillips Curve Is Dead (except in Federal Reserve and CBO models)

“Is the Phillips Curve Dead?” asked Princeton economistAlan Blinder in a May 3Wall Street Journal article. The former Vice-Chairman of the Fed noted that “the correlation between unemployment and changes in inflation is nearly zero… Inflation has barely moved as unemployment rose and fell.”For a veteran Ivy League Keynesian like Blinder to doubt the Phillips Curve was doctrinal heresy, comparable to a monetarist asking if money matters or a supply-sider wondering aloud if a 91% tax rate is better than a 28% rate.Wall Street Journal columnistGreg Ip later explained the dilemma and expanded it: “Standard models of the economy are built on a simple relationship: When unemployment goes down, inflation eventually goes up. That relationship, dubbed the Phillips Curve, has looked sickly for years. In Japan, it may be dead.”  Unemployment is 2.5% in Japan, yet inflation is 1.1% and only 0.4 % if we leave out energy and food (“core” inflation).  For that matter, the unemployment rate is 2.0% in Singapore yet inflation is 0.2%.Paul Samuelson and Robert Solow first fabricated a “Phillips Schedule” in 1960 using a wage-push notion of inflation and U.S. data from 1934 to 1958.  Leaving aside the Great Depression and WWII price controls, they concluded “it would take more like 8 per cent unemployment to keep money wages from rising. And they would rise at 2 to 3 per ce nt per year with 5 or 6 per cent of the labor force unemployed.”  Despite caveats that this ...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs