The Phillips curve cannot fail, it can only be failed!
But doesn't this speak well of the credibility of the inflation targeting regime? A fully credible regime should be one in which the trade-off is pretty flat.
The trade-off increasingly looks like a residual from imperfect monetary policy endogenisation of economic conditions. Given that the part rate and epop would seem to be trending, the neutral rate is going to have to soak up the otherwise unmodelled structural change in the labour market. So my sense is that the NAIRU is the thing that has to give, which has been pretty much what has happened in the past (Glenn Stevens always said this would happen). So the framework on which they are conditioning the inflation outlook will be retrofitted to the outcomes it did not predict.
Philip Lowe argued the flat Phillips curve meant that monetary policy couldn’t do anything, when in fact it showed monetary policy was very effective. The Lowe RBA sat on its hands waiting for the Phillips curve to behave as expected, denying the RBA’s own agency.
The Phillips curve cannot fail, it can only be failed!
But doesn't this speak well of the credibility of the inflation targeting regime? A fully credible regime should be one in which the trade-off is pretty flat.
I think the change here is less whether the tradeoff exists and what level of unemployment we center the trade off around.
The trade-off increasingly looks like a residual from imperfect monetary policy endogenisation of economic conditions. Given that the part rate and epop would seem to be trending, the neutral rate is going to have to soak up the otherwise unmodelled structural change in the labour market. So my sense is that the NAIRU is the thing that has to give, which has been pretty much what has happened in the past (Glenn Stevens always said this would happen). So the framework on which they are conditioning the inflation outlook will be retrofitted to the outcomes it did not predict.
Look I wouldn’t rule any theory in (or out) on the basis of two data points!
Philip Lowe argued the flat Phillips curve meant that monetary policy couldn’t do anything, when in fact it showed monetary policy was very effective. The Lowe RBA sat on its hands waiting for the Phillips curve to behave as expected, denying the RBA’s own agency.