The Phillips curve regains attention

Laurel Graefe, senior economic research analyst at the Atlanta Fed, wrote a short post on the Phillips curve for macroblog. The evolution of unemployment and inflation in the USA since 2008 actually needs a very detailed analysis.

I agree that the Phillips curve is not a productive idea since it does not explain observations in many countries. Moreover it is counterproductive because unemployment in the USA (and some other developed countries) lags behind inflation. We have published a number of papers on this issue. For example,"The Anti-Phillips curve" . It is funny, that Laurel being a Senior Economic Research Analyst does share our opinion on the helplessness of the conventional Phillips curve.

Also, we fully agreed that it is the best time to make deciding study of the link between inflation and unemployment - the change in both variables is fast and dramatic. Our generalized model, linking both inflation and unemployment to the change in the level of labor force, should also be tested against the most recent data. Usually, we do not use high-frequency data for our analysis because the uncertainty of the change over short periods is too high, but the rate of growth in unemployment and fall in inflation is really large to overcome this shortcoming.
We are in the initial stage of the analysis and will trace the near future developments. At this stage, the generalized model looks an adequate one - the drop in CPI fully compensates the rise in unemployment according to their coefficients in the relationship. In other words, the change in unemployment is driven by the change in inflation.
On the other hand, the time lag suddenly fell from 2.5 years to several months in 2008. We need more time to understand the causes of the shift. It is not excluded that the current state is related to panic deviation from the generalized equilibrium. Then the spike in unemployment and inflation are only a short one fluctuation.

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