Working Paper: CEPR ID: DP2292
Authors: Andrew Haldane; Danny Quah
Abstract: This paper documents some stylized facts on evolving UK Phillips curves, and shows how these differ from their US versions. We interpret UK Phillips curve dynamics in a positive theory of monetary policy - how policy-maker attitudes on the Phillips curve have evolved since the 1950s - rather than, more traditionally, as interaction between exogenous demand and supply disturbances. Combining this framework with reasoned conjectures on how policy-makers' beliefs have changed helps explain some features of the evolving UK Phillips curve. We suggest that correlations suggesting an extreme favourable unemployment-inflation tradeoff might indicate not something to be exploited but instead only policy-makers' correctly acknowledging that no tradeoff exists.
Keywords: beliefs; inflation; natural rate hypothesis; stability
JEL Codes: C22; C23; E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Policymakers' beliefs about the Phillips curve (E31) | Observed correlation between inflation and unemployment (E31) |
| Misalignment of beliefs (D80) | Misguided monetary policies (E49) |
| Misguided monetary policies (E49) | Exacerbated inflationary pressures (E31) |
| Recognition of the absence of a tradeoff (D10) | Horizontal Phillips curve since 1980 (E31) |