Christopher Waller, Speech/Q&A: The Unstable Phillips Curve

Q&A Segment

In the 10 minute Q&A, goods and labor supply was discussed, although monetary policy, the banking crisis and the overall economy was not mentioned.

Speech Segment

“My topic tonight is “The Unstable Phillips Curve.”1 This is not intended to be a deep academic analysis but rather to present some thoughts for discussion.”

“What do economic data tell us about this relationship? We all know that if you simply plot inflation against the unemployment rate over the past 50 years, you get a blob. There does not appear to be any statistically significant correlation between the two series. In the 1980s and 1990s, so-called freshwater macroeconomists, who tended to work at universities in the middle of the country, argued the data showed that stories about nominal wage or price stickiness were simply wrong and we should quit talking about Phillips curves of any type. Diehard believers in the Phillips curve, the saltwater economists working on the East and West coasts, argued that the data blob was the result of unstable inflation expectations. If inflation expectations were not stable, then the Phillips curve would shift around in such a way that you could not observe the true relationship in the data.”

“What would cause inflation expectations to be unstable? Kydland and Prescott (1977) provided an explanation, later popularized by Barro and Gordon (1983), that blamed the central bank. If the central bank’s promises to keep inflation low were not credible, then private agents’ inflation expectations would be different than what the central bank promised, which in turn would cause the Phillips curve to shift around. As a result, the idea that the central bank had to make credible promises to keep inflation low became a bedrock principle of central banking that holds to this day.”