Flattening of the Phillips Curve: Implications for Monetary Policy
IMF Working Papers, April 1, 2007
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Bibliographic details
- Authors: Dora M Iakova
- Published: April 1, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451866407.001
Summary
- Over the past decade, inflation has become less responsive to domestic demand pressures in many industrial countries.
- This development has been attributed, in part, to globalization forces.
- A small macroeconomic model, estimated on UK data using Bayesian estimation, is used to analyze the monetary policy implications of this structural change.
- The focus is on the implications of a globalization-related flattening of the Phillips curve for:
- the trade-off between inflation and output gap variability, and
- the efficient monetary policy response rule.
Model and Methods
- Model type: small macroeconomic model.
- Estimation approach: Bayesian estimation.
- Data: UK data (as used in the model estimation).
Key Findings
- Inflation has become less responsive to domestic demand pressures in many industrial countries over the past decade.
- This reduced responsiveness is linked, in part, to globalization forces.
- The flattening of the Phillips curve affects:
- the trade-off between inflation variability and output gap variability, and
- the design and performance of efficient monetary policy response rules.
Policy Implications
- Monetary policy must account for a globalization-related flattening of the Phillips curve when evaluating the trade-off between stabilizing inflation and stabilizing the output gap.
- The efficient monetary policy response rule may need to be adjusted in light of a flatter Phillips curve to address the altered inflation-output gap relationship.
Content in this bundle
- 1. Optimized Response Rule Coefficients