| 3 Estimated Tradeoffs Between Unemployment and Inflation (2008) | |||||||||||||
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| An important question in macroeconomics is the size of the tradeoff between unemployment and inflation. I have been asked by the organizers of this symposium to consider this question, and so this is yet another pa-per on the tradeoff issue. Given an econometric model of price and wage behavior, it is straightforward to compute the tradeoff. The key problem is finding the model that best approximates the unknown structure, and this problem is the focus of this paper. Three models of price and wage behavior are considered. The first, Model 1, is the one contained in my macroeconomic model of the United States (Fair, 1984). The second, Model 2, is one that is closer to what might be considered the standard model in the literature. The third, Model 3, is one in which there is no long-run tradeoff between unemployment and inflation. Model 3 is Model 2 with a certain restriction on the coefficients. The paper is organized as follows. Some methodological issues are dis-cussed first. The models are then presented, estimated, and tested. The unemployment-inflation tradeoffs implied by each model are then pre-sented, and the final section contains a general evaluation of the results and a discussion of their consequences for macroeconomic policy and research. Some methodology It will be useful to present a few of my views about macroeconomic re-search before launching into the specification of the equations. The first issue concerns how much information one expects to get out of macro time series data. Consider, for example, the question of which demand var-iable to use in a price or wage equation. My experience is that macro data are not capable of discriminating among many different measures of | |||||||||||||
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