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Friday, October 20, 2006

Once Again, There is Too a Short-Run Phillip's Curve

One more time, There is Too a Short-Run Phillips Curve. This commentary disagrees with economists who claim there is a permanent inflation-unemployment tradeoff. However, it's been quite a long-time since anyone seriously suggested a permanent tradeoff between inflation and unemployment, particularly since Phelps, Friedman, Lucas and others came up with came up with the expectations augmented short-run Phillips curve to rebut this idea. Thus, the commentary below strikes at a position - a permanent tradeoff between inflation and output - that no economist that I know of holds. It is the nature of the short-run Phillip's curve that is at issue, how long the short-run tradeoff persists, the steepness of the tradeoff, whether hybrid versions of the Phillips curve are needed, etc., and contrary to what is stated in this commentary, the existence of a short-run Phillip's curve is well-accepted. I do agree with the commentary's suggestion that somebody doesn't understand this literature, but I doubt very much that it is Bernanke, Mishkin, and others at the Fed that are the ones missing key pieces of this line of research:

Time to Throw the Phillip's Curve, by Jerry Bowyer, NRO: Last week the Nobel committee announced that this year’s prize in economics would be going to Dr. Edmund Phelps... This is good news indeed for advocates of supply-side economics. Phelp’s principal academic achievement is his successful rebuttal of one of the central tenets of modern Keynesianism: the Phillips curve.

Someone should alert the board of governors at the Federal Reserve of Phelps vindication, since the minutes released from the Fed’s most recent meeting still contain the same old Keynesian gobbledygook...

The Phillips-curve perspective is flawed. Attempts to stimulate growth and employment by way of loose money inevitably fail... Phelps has disproved the Phillips curve, at least as a long-run economic planning tool. He argues persuasively that labor markets determine the unemployment rate over the long run. ...

Alan Greenspan, despite his better training, basically governed the central bank as a Keynesian... One wonders what the world would look like now if not for the pernicious doctrine that growth causes inflation. What if planners a half-century ago never adopted the Phillips curve and the ’50s.. Imagine the ’70s without stagflation? What if Greenspan hadn’t destroyed the telecomm sector in the late ’90s with his tight-money policy? ... How many people who are now middle class would be affluent? How much global poverty would have been alleviated if the U.S. economy had been even more powerful in recent decades, able to drag that much more of the globe out of the muck and into prosperity?

A Nobel Prize for Dr. Edmund Phelps is an opportunity for the Federal Reserve, Wall Street forecasters, and the financial press to bury forever the enormously destructive theoretical error that is the Phillips curve.

Saying that economists believe "growth causes inflation" mischaracterizes the issue. Nobody believes that growth is inflationary. Increases in productivity (i.e. growth in aggregate supply) puts downward pressure on prices. It is growth in demand relative to growth in supply that matters, and if demand growth outstrips supply growth, inflation will result.

    Posted by on Friday, October 20, 2006 at 12:57 PM in Economics, Macroeconomics, Monetary Policy, Technology | Permalink  TrackBack (1)  Comments (16)


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    » Fuzzcharts on the Phillips Curve from Angry Bear

    Mark Thoma coined the term Fuzzcharts as a way of expressing how incredibly stupid Jerry Bowyer is. Bowyer writes: Last week the Nobel committee announced that this year’s prize in economics would be going to Dr. Edmund Phelps of Columbia. Thi... [Read More]

    Tracked on Saturday, October 21, 2006 at 01:57 PM


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