It is a relatively small step from here to the plot of the unemployment rate on changes in factor prices (in this case wage rates) in Phillips (1958). There have been a large number of estimates made of the Phillips curve in many countries over different periods of time. McLeay and Tenreyro (2019) highlight another reason why a flattening of the Phillips curve can be expected.
This will induce a negative relationship between inflation and the output gap "blurring the identification of the (positively sloping) Phillips curve" (p.1). Jacob and van Florenstein Mulder (2019) examine the flattening of the Phillips curve in the case of New Zealand. 15 For a comprehensive synopsis of Friedman's views on inflation and employment derived from an analysis of the Phillips curve, see Schwarzer (2018).
Lucas and Rapping (1969) discuss the role of expectations in the context of the Phillips curve. Phillips (1958) is considered one of the key papers in this latter category, but Lucas was focused on the limitations of the Phillips curve. As shown by Cecchetti and Kim (2005), the nature of the expectations structure in the Phillips curve is a key element in the inflation versus price level targeting debate.
A summary of the intellectual ancestors and descendants of the Phillips curve is presented in Table 1.
Dynamic Stabilisation and Optimal Control
They conclude that under these circumstances a case could be made for a temporary increase in the upper limit of the inflation target. The importance of the underlying Phillips Curve to the Taylor rule can be demonstrated with a basic three-equation macroeconomic model. The central bank is concerned both with production fluctuations and with inflation deviations from the target level.
They aim to minimize a loss function which consists of the squared deviations, respectively, of output and inflation from their target levels. The weights assigned to each of these terms will reflect the preferences of the central bank; in other words, the degree of aversion to deviations in inflation rates versus deviations in output. This tells the central bank the extent to which the interest rate should be adjusted relative to its target level in response to the deviation of the inflation rate from its target level.
In some versions, an unemployment gap can be used instead of the output gap. She finds that adjusting the way inflation expectations are modeled raises the NAIRU estimate for a number of OECD countries, strengthening the relationship between inflation and labor market conditions, and a concomitant progressively steepening Phillips curve. But whatever embellishments one might wish to make, the Phillips curve remains an integral part of the basic structure of a macroeconomic model and a key element in the derivation of the Taylor rule.24
Based on this concept, the central bank's task of dealing with the interplay between output and inflation can be usefully broken down into two steps. Its position will depend on the structure of the economy and the nature of economic innovations. Again, it is the bank's preferences, presumably reflecting society's, that should be used to assign relative weights, as was the case with the Taylor rule.
25 Buckle (2019) analyzes the use of the Taylor curve to assess the welfare implications of monetary policy decisions. 24 For a detailed history of the Taylor Rule and its relationship to the work of Phillips, see Asso, Khan and Leeson (2007) and Asso and Lesson (2012). 25 Chatterjee (2002) provides a clear discussion of the challenges in comparing the wealth implications of selecting different points on the Taylor curve.
Economic Growth
Unlike previous work in which government spending had been treated as a given constant, a key Phillips innovation was the endogenization of government spending. By viewing government spending as a policy variable, he allowed continuous adjustments to meet specific objectives. His articles on stabilization policy (Phillips 1954 and 1957) put forward a number of key concepts and innovations that “may be regarded as a remarkable foreshadowing of many of the current macroeconomic models” (Pagan, 2000a, p.132).
He emphasized the need for a dynamic framework (as opposed to the comparative static models of the IS-LM era) and paid particular attention to the importance of delays. He drew on his electrical background to introduce rules based on proportional, integral, and derivative controls to achieve stabilization. In a series of simulations, Spencer and Grimes (1980) found that the derivative-based policy response was generally more effective at achieving stabilization than other approaches.
Phillips (1961b) addressed the question of whether an increase in unemployment associated with policies to control inflation could be detrimental to overall economic growth. He argued that this was unlikely and emphasized that economic growth depended on the willingness to save and increased productivity through factors such as education and research. Incidentally, his reference here and elsewhere was to the role of human capital before the Becker revolution.
Laidler goes on to note that Jonson was instrumental in introducing the Bergstrom-Wymer model to the RBA (fn.7). 1984) cite Challen and Hagger (1979), who referred to the RBII Bank model as belonging to the Phillips-Bergstrom-Wymer class of models. Bergstrom (2000b) himself notes that this model "stemmed from the cyclical growth model developed in another of Phillip's pioneering contributions." This contribution was the development of "dynamic disequilibrium models that synthesize real and monetary phenomena, and cycles and growth, as Phillips' model did" Bergstrom (2000a, p.192).
Econometrics
The development of dynamic models as systems of differential equations provided the basis for explaining cyclical variations in economic performance. Subsequent advances in statistical techniques and dramatic gains in computing power have largely meant that modern macroeconomic modeling does not directly involve Phillips. It is undeniable, however, that his pioneering work on dynamic macroeconomic models, error-correction mechanisms, control methods, and estimation of continuous-time systems underpins much of the econometrics involved in today's planning, estimation, forecasting, and policymaking using macroeconomic models.28.
Forecasting and Policy Models
Turkey
Government expenditure and income tax as well as the output gap have a direct impact on real marginal costs and thus indirectly on inflation. An increase in the income tax rate directly increases real wages, which also affects the firm's real marginal costs. Therefore, an increase in real marginal cost is reflected in the price of a product and also in inflation.
The slope of the Phillips curve shows the sensitivity of domestic inflation to real marginal costs” (Büyükbaşaran, Çebi and Küçük, 2018, p.4).
Conclusions
Nevertheless, there is a considerable amount of modeling that builds on the descendants of the Phillips curve. Mazumder (2020) "A Phillips Curve for the Euro Area." European Central Bank, Working Paper Series No. 2019) MARTIN has his place: A macroeconomic model of the Australian economy. Bank of England (2004) "The New Bank of England Quarterly Model." Bank of England Quarterly Bulletin Summer The New Keynesian Phillips Curve in the United States and the Euro Area: Aggregation Bias, Stability and Robustness.
Coibion, O., Y.Gorodnichenko and R.Kamdar (2017) "Formation of expectations, inflation and the Phillips curve." Working document no. Cato Institute, Washington, DC. https://www.cato.org/publications/commentary/its-time-bury-phillips-curve. Federal Reserve Bank of New York, Staff Reports, no. 2020) “The Phillips Curve in the ECB.”.
Brookings Papers on Economic Activity The Time-Varying NAIRU and its Implications for Economic Policy.”. 2008) “The History of the Phillips Curve: An American View”. Paper presented at the ESAM08 Conference: Markets and Models: Policy Frontiers in the A.W.H. 2011) “History of the Phillips Curve: Consensus and Bifurcation”. http://economics.weinberg.northwestern.edu/robertgordon/files/RescPapers/HistoryPhillipsCurve.pdf. 2013) "The Phillips Curve is Alive and Well: Inflation and the NAIRU During the Slow Recovery.".
Jeon (2008) "The Evolution of the Phillips Curve: A Modern Time Series Viewpoint." Department of Economics, University of California, San Diego. 2014) "Four Lectures on Central Banking." Motu Economic and Public Policy Research, Working Paper 14-02, Wellington, New Zealand. Reserve Bank of Australia, Research Discussion No. 2020) “Inflation Expectations and the Phillips Curve: Then and Now”. Economic Review, Federal Reserve Bank of Richmond https://www.richmondfed.org/publications/research/economic_review/1978/er640104 Humphrey, T. 1985a) “The Evolution and Policy Implications of the Phillips Curve.”.
Economic Review, Federal Reserve Bank of Richmond media/richmondfedorg/publications/research/economic_review/1985/pdf/er710201.pdf Humphrey, T.M. 1985b) "The Early History of the Phillips Curve". Economic Review, Federal. media/richmondfedorg/publications/research/economic_review/1985/pdf/er710502.pdf Iakova, D. 2007) "Flattening of Phillips Curve: Implications for Monetary Policy.". 1996. Federal Reserve Bank of Richmond. https://www.richmondfed.org/~/media/richmondfedorg/publications/research/economic_qu arterly/2008/fall/pdf/king.pdf. 2009) "The anti-Phillips crow.".
Ng, M., D. Wessel and L. Sheiner (2018) "What is the Phillips Curve?" Hutchins Center Explains, The Brookings Institution, Washington, DC. Further econometric estimation of the Phillips curve in which the dependent variable was the change in wage rates and the explanatory variables were aggregate unemployment and lagged price level change.
Working Papers in Public Finance
