Working Paper: CEPR ID: DP13480
Authors: Rgis Barnichon; Geert Mesters
Abstract: We propose a model-free approach for determining the inflation-unemployment trade-off faced by a central bank, i.e., the ability of a central bank to transform unemployment into inflation (and vice versa) via its interest rate policy. We introduce the Phillips multiplier as a statistic to non-parametrically characterize the trade-off and its dynamic nature. We compute the Phillips multiplier for the US, UK and Canada and document that the trade-off went from being very large in the pre-1990 sample period to being small (but significant) post-1990 with the onset of inflation targeting and the anchoring of inflation expectations.
Keywords: marginal rate of transformation; inflation-unemployment tradeoff; dynamic multiplier; instrumental variables; Phillips curve
JEL Codes: C14; C32; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pre-1990 period (N11) | very large MRT between unemployment and inflation (E24) |
| post-1990 period (F54) | significantly decreased MRT between unemployment and inflation (J64) |
| anchoring of inflation expectations (E31) | reduced ability of the Fed to influence inflation through unemployment movements (E31) |
| Phillips multiplier (E19) | insights into the evolution of the inflation-unemployment tradeoff over time (E31) |
| monetary shock (E39) | expected cumulative change in inflation (E31) |
| decrease in expected unemployment by 1 percentage point (J68) | expected cumulative change in inflation (E31) |
| policy-induced changes in unemployment (J68) | inflation (E31) |