Working Paper: NBER ID: w24148
Authors: Robert E. Hall; Thomas J. Sargent
Abstract: The immediate effect of Friedman's 1968 AEA presidential address on the economics profession was the introduction of an adaptive term in the Phillips curve that shifted the curve, as Friedman proposed, based on expected inflation. Initial formulations suggested that the shift was less than point-for-point, but later thinking, based on the emerging idea of rational expectations, together with the experience of the 1970s, came to agree with Friedman that the shift was by the full amount. The profession also recognized that Friedman's point was deeper---real outcomes are invariant to the monetary policy rule, not just to the trend in inflation. The presidential address made an important contribution to the conduct of monetary policy around the world. It ushered in low and stable inflation rates in all advanced countries, and in many less advanced ones.
Keywords: Monetary Policy; Inflation; Unemployment; Phillips Curve; Rational Expectations
JEL Codes: E31; E52; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anticipated inflation (E31) | actual inflation (E31) |
| monetary policy (E52) | unemployment (J64) |
| anticipated monetary expansion (E59) | inflation (E31) |
| unanticipated monetary expansion (E49) | unemployment (J64) |
| monetary policy invariance hypothesis (E41) | real outcomes (unemployment, real interest rate) (E24) |
| Phillips curve evolution (E31) | monetary policy invariance hypothesis (E41) |