Working Paper: CEPR ID: DP321
Authors: George S. Alogoskoufis; Ron Smith
Abstract: This paper presents an investigation of the empirical significance of the Lucas Critique for the Phillips Curve. The investigation is carried out with annual historical time series for the United Kingdom (1857-1987) and the United States (1892-1987). The results, for two different models of the Phillips Curve, suggest that there are sizeable and statistically significant shifts in the parameters of wage equations when the process generating price inflation changes. The two major shifts that we identify coincide with the abandonment of the classical gold standard in 1914, and the disintegration of the Bretton Woods gold-dollar standard in the late 1960s.
Keywords: Phillips Curve; Lucas Critique; Econometric Models; Inflation
JEL Codes: 134; 210
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shifts in inflation processes (E31) | wage inflation (J31) |
| abandonment of the classical gold standard (N13) | upward shift in persistence of inflation (E31) |
| disintegration of the Bretton Woods system (F33) | upward shift in persistence of inflation (E31) |
| shifts in inflation persistence (E31) | coefficient of lagged price inflation (E31) |
| historical time series data (N00) | identification of causal relationships (C22) |