| Mis-Specification in Phillips Curve Regressions: Quantifying Frequency Dependence in This Relationship While Allowing for Feedback (2008) | |||||||||||||||||
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| All errors, misinterpretations and omissions are ours. All views expressed in this paper are those of the authors and do not reflect the views or policies of the Bureau of Labor Statistics or the views of other BLS staff members. Mis-specification in Phillips Curve regressions The Phillips curve has long been a focus of empirical macroeconomic research. Here we provide compelling evidence that previous models quantifying the dynamic relationship between inflation and unemployment rates have been mis-specified in their assumption that the coefficient on unemployment is a constant. Instead, we find that this coefficient is frequency-dependent: the inflation impact of a fluctuation in the unemployment rate differs for a fluctuation which is part of a smooth pattern of changes versus a fluctuation which is an isolated event, just as Friedman’s “natural rate ” hypothesis suggests. In particular, we analyze a standard Phillips Curve regression specification using a newly developed econometric technique capable of consistently estimating the frequency dependence in a feedback relationship. Explicitly allowing for feedback in such a relationship is essential | |||||||||||||||||
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