PRODUCTIVITY GROWTH AND THE PHILLIPS CURVE: A REASSESSMENT OF THE US EXPERIENCE
Article first published online: 25 NOV 2010
© 2010 The Authors. Bulletin of Economic Research © 2010 Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research.
Bulletin of Economic Research
Volume 64, Issue 3, pages 344–366, July 2012
How to Cite
Karanassou, M. and Sala, H. (2012), PRODUCTIVITY GROWTH AND THE PHILLIPS CURVE: A REASSESSMENT OF THE US EXPERIENCE. Bulletin of Economic Research, 64: 344–366. doi: 10.1111/j.1467-8586.2010.00361.x
- Issue published online: 3 JUL 2012
- Article first published online: 25 NOV 2010
- frictional growth;
- impulse response functions;
- new Phillips curve;
- productivity growth;
- roaring 1990s;
- stagflating 1970s
In this paper, we analyse a new Phillips curve (NPC) model and demonstrate that (i) frictional growth, i.e., the interplay of wage staggering and money growth, generates a non-vertical NPC in the long run and (ii) the Phillips curve (PC) shifts with productivity growth. On this basis we estimate a dynamic system of macro-labour equations to evaluate the slope of the PC and explain the evolution of inflation and unemployment in the USA from 1970 to 2006. Because our empirical methodology relies heavily on impulse response functions, it represents a synthesis of the traditional structural modelling and (structural) vector autoregressions. We find that the PC is downward-sloping with a slope of −3.58 in the long run. Furthermore, during the stagflating 1970s, the productivity slowdown contributed substantially to the increases in both unemployment and inflation, whereas the monetary expansion was quite ineffective and led mainly to higher inflation. Finally, the monetary expansion and productivity speedup of the roaring 1990s were both responsible for the significant lowering of the unemployment rate.