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What Happened to the Phillips Curve?
from The New York Times, March 9, 2000...
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Dear Professor DeLong:
I am an economist at Goldman Sachs and read with interest your piece on the macro implications of the new economy, in particular the part about the NAIRU. I completely agree that faster productivity growth -- rather than changes in the labor market per se -- are the most plausible explanation for the apparently lower NAIRU. A few months ago I wrote a piece for Goldman along those lines, which I attach below. If you are aware of any references to (academic or other) work on this issue, I would be grateful if you could pass them along. Despite its apparent simplicity, I haven't seen anything on this idea apart from your notes.
I also noted with interest the comment on your piece (by a George Gelauff). The idea that productivity growth cannot affect the long-run NAIRU -- supposedly because this implies a further and further fall in the share of labor compensation in GDP -- is faulty but amazingly widespread. I have come across this view repeatedly in talking about the NAIRU with both clients and government economists.
Contributed by Jan Hatzius (firstname.lastname@example.org) on September 1, 2000.
I really like your web site, just discovered today. I also liked your Phillips curve article. When I was in school there were several key points on which I disagreed with the conventional wisdom, and where developments in the years since to have proved my viewpoint to have been the correct one. Thanks to your article, I am pleased to be able to add my Phillips Curve interpretation to that list.
I argued 30 years ago (with absolutely no success in convincing my economics professors!) that even if the Phillips Curve was as fundamental an economic relationship as it was presented to be -- which I doubted -- that it did not follow that such an economic "blunt instrument" should serve as the basis for policy making. I argued then, and still believe, that other more benign economic control mechanisms should be used to achieve desired economic results, leaving the Phillips Curve effect (with its concommitant adverse impacts on jobs) to be only the policy weapon of last resort.
Thanks for your innovative thinking.
Contributed by Peter Eirich (Eirich@erols.com) on March 30, 2000.
Dear Mr. DeLong:
What surprises me about the Phillips curve is that anyone ever took it seriously in the first place.
Back when inflation was "a problem," I used to study the various theories of the causes of inflation. In the case of all of them, I sooner of later found the point where the theory went " mumble, mumble, the money supply expands relative to the volume of goods and services produced." If the authors of the theories were pressed, they invariably explained that of course, if the money supply stayed stable, all kinds of terrible things would happen, but prices would remain stable. If they asked what would happen if the money supply was expanded without any of the things taking place that their theories used to explain inflation, they would claim it wouldn't happen, but eventually get around to admitting that prices would rise.
So expansion of the money supply relative to the supply of goods and services is necessary and sufficient to explain inflation. What therefore is the question the Phillips curve and other such things are
Contributed by Stephen St. Onge (email@example.com) on March 17, 2000.
Thanks for your interesting commentary on the Philips curve. I was, however, surprised that you did not mention globalization and the rise of the NICs (and especially China) as a key factor conditioning price changes and aggregate supply dynamics.
Contributed by Barry Feldman (firstname.lastname@example.org) on March 17, 2000.
Dear Prof. Delong,
I read your article in the International Herald Tribune and found it very interesting. In my work on portuguese stability programme the issue of growth potential and Nairu was raised by Commission officials. We agree to disagree. It does not mean that we are right - that is raising growth prospects and low inflation - or that a more conservative view is not better. In OECD forecasting business, the US case as you presented has been in discussion for some years - known as the hard-landing vs smooth landing scenario. After two or three years of dire predictions on the US economy, OECD just stop worrying about the latter. I agree with you that we need better theory to understand the US experience.
Contributed by Fernando Chau (email@example.com) on March 17, 2000.
As long as the U.S. has a floating exchange rate, it is not clear to me that foreign competition puts that much downward pressure on inflation: the exchange rate adjusts, after all...
And the way I think of it is that you need the Phillips curve so you can figure out what is the appropriate rate of growth of the money stock...
Contributed by Brad DeLong (firstname.lastname@example.org) on March 17, 2000.
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