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July 15, 2014

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Posted: 15 Jul 2014 12:06 AM PDT

'Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve'

Posted: 14 Jul 2014 01:49 PM PDT

Via email, a comment on my comments about the difficulty of settling questions about the Phillips curve empirically:

Dear Professor Thoma,
I saw your recent post on the difficulty of empirically testing the Phillips Curve, and I just wanted to alert you to a survey paper on this topic that I wrote with Sophocles Mavroeidis and Jim Stock: "Empirical Evidence on Inflation Expectations in the New Keynesian Phillips Curve". It was published in the Journal of Economic Literature earlier this year (ungated working paper).
In the paper we estimate a vast number of specifications of the New Keynesian Phillips Curve (NKPC) on a common U.S. data set. The specification choices include the data series, inflation lag length, sample period, estimator, and so on. A subset of the specifications amount to traditional backward-looking (adaptive expectation) Phillips Curves. We are particularly interested in two key parameters: the extent to which price expectations are forward-looking, and the slope of the curve (how responsive inflation is to real economic activity).
Our meta-analysis finds that essentially any desired parameter estimates can be generated by some reasonable-sounding specification. That is, estimation of the NKPC is subject to enormous specification uncertainty. This is consistent with the range of estimates reported in the literature. Even if one were to somehow decide on a given specification, the uncertainty surrounding the parameter estimates is typically large. We give theoretical explanations for these empirical findings in the paper. To be clear: Our results do not reject the validity of the NKPC (or more generally, the presence of a short-run inflation/output trade-off), but traditional aggregate time series analysis is just not very informative about the nature of inflation dynamics.
Kind regards,
Mikkel Plagborg-Moller
PhD candidate in economics, Harvard University

Congress and Monetary Policy

Posted: 14 Jul 2014 01:42 PM PDT

Zero percent agree that Congress should impose a monetary policy rule on the Fed:

IGM Forum: Should the Fed be required to follow a rule?

I am surprised that 11% are uncertain, but see their accompanying comments (the question also asks about how certain respondents are of their answers -- some people are fairly certain they are uncertain).

Is There a Phillips Curve? If So, Which One?

Posted: 14 Jul 2014 12:21 PM PDT

One place that Paul Krugman and Chris House disagree is on the Phillips curve. Krugman (responding to a post by House) says:

New Keynesians do stuff like one-period-ahead price setting or Calvo pricing, in which prices are revised randomly. Practicing Keynesians have tended to rely on "accelerationist" Phillips curves in which unemployment determined the rate of change rather than the level of inflation.
So what has happened since 2008 is that both of these approaches have been found wanting: inflation has dropped, but stayed positive despite high unemployment. What the data actually look like is an old-fashioned non-expectations Phillips curve. And there are a couple of popular stories about why: downward wage rigidity even in the long run, anchored expectations.

House responds:

What the data actually look like is an old-fashioned non-expectations Phillips curve. 
OK, here is where we disagree. Certainly this is not true for the data overall. It seems like Paul is thinking that the system governing the relationship between inflation and output changes between something with essentially a vertical slope (a "Classical Phillips curve") and a nearly flat slope (a "Keynesian Phillips Curve"). I doubt that this will fit the data particularly well and it would still seem to open the door to a large role for "supply shocks" – shocks that neither Paul nor I think play a big role in business cycles.

Simon Wren-Lewis also has something to say about this in his post from earlier today, Has the Great Recession killed the traditional Phillips Curve?:

Before the New Classical revolution there was the Friedman/Phelps Phillips Curve (FPPC), which said that current inflation depended on some measure of the output/unemployment gap and the expected value of current inflation (with a unit coefficient). Expectations of inflation were modelled as some function of past inflation (e.g. adaptive expectations) - at its simplest just one lag in inflation. Therefore in practice inflation depended on lagged inflation and the output gap.
After the New Classical revolution came the New Keynesian Phillips Curve (NKPC), which had current inflation depending on some measure of the output/unemployment gap and the expected value of inflation in the next period. If this was combined with adaptive expectations, it would amount to much the same thing as the FPPC, but instead it was normally combined with rational expectations, where agents made their best guess at what inflation would be next period using all relevant information. This would include past inflation, but it would include other things as well, like prospects for output and any official inflation target.
Which better describes the data? ...
[W]e can see why some ... studies (like this for the US) can claim that recent inflation experience is consistent with the NKPC. It seems much more difficult to square this experience with the traditional adaptive expectations Phillips curve. As I suggested at the beginning, this is really a test of whether rational expectations is a better description of reality than adaptive expectations. But I know the conclusion I draw from the data will upset some people, so I look forward to a more sophisticated empirical analysis showing why I'm wrong.

I don't have much to add, except to say that this is an empirical question that will be difficult to resolve empirically (because there are so many different ways to estimate a Phillips curve, and different specifications give different answers, e.g. which measure of prices to use, which measure of aggregate activity to use, what time period to use and how to handle structural and policy breaks during the period that is chosen, how should natural rates be extracted from the data, how to handle non-stationarities, if we measure aggregate activity with the unemployment rate, do we exclude the long-term unemployed as recent research suggests, how many lags should be included, etc., etc.?).

Event Time vs. Clock Time

Posted: 14 Jul 2014 11:32 AM PDT

I taught my first class at UT Austin today. I am staying a little over a mile and a half from the campus, so I decided to walk. I discovered that it's a lot hotter in Texas than in Oregon! I will have to get used to this so I'm not dripping wet during my classes...

Anyway, back to the usual. This is from Chris Dillow (I am definitely an even time type, one of the big reasons I avoided the 8-5 world):

Time, by Chris Dillow: Google boss Larry Page recently called for the end of the conventional 40-hour working week. Some new research suggests this could have more profound cultural effects than generally thought.
Anne-Laure Sellier and Tamar Avnet primed people to choose between organizing some jobs in "clock-time" (scheduling a specific job at a specific time) or in "event-time" (doing a job until you reach a natural break). They found that the choice led to two big pyschological differences.
First, clock-timers were more likely to have an external locus of control; they were more likely to see their lives as determined by fate or powerful others. Event-timers, on the other hand, tended to have an internal locus, regarding themselves as in control of their own fate. ...
Secondly, clock-timers were less able to savour positive emotions than event-timers - perhaps because if you have an eye on the clock you are less likely to lose yourself in a job and so enjoy flow. ...
Here, though, we need some history. One key feature of the emergence of industrial capitalism was that bosses replaced event-time with clock-time. ... But as Sellier and Avnet suggest, this replacement had some cultural and psychological effects...
And herein lies the thing. If Mr Page is right and/or if some combination of robots and a citizens basic income create a post-scarcity economy in which we are ... less subject to the tyranny of the clock, this could lead to big cultural changes which we have barely begun to think about.

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