Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Retrospective Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Retrospective

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June 9-11, 2008
Wequassett Inn Chatham, Massachusetts

It has been fifty years since A.W. Phillips published the famous article on inflation and unemployment that established the Phillips curve as a central concept in macroeconomic analysis and policymaking. Today, despite ongoing debate about the validity of this approach, many academic economists, policy makers and financial correspondents use Phillips curve concepts in discussing the influence of demand growth on inflation, as well as the relationship between unemployment, wages and prices. But the Phillips curve of today is not that of fifty years ago. And the economy and our understanding of price setting behavior, the determinants of inflation and the role of monetary policy have all evolved considerably over that period.

This conference gathered economists, policy makers and representatives of industry, labor and financial institutions to re-examine the theoretical and empirical validity of the Phillips curve in its recent specifications and to consider what the Phillips curve has taught us about how the economy works. What have economists learned about price and wage setting and inflation expectations that would improve the way we formulate and use the Phillips curve? In turn, what have we learned from the Phillips curve approach about inflation? How can we apply these lessons to improve the conduct of monetary policy?

The collected papers presented at this conference were published in Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Retrospective (MIT Press, October 2009).

Sample chapters are available, and the complete book can be ordered from MIT Press. offsite


Monday, June 9 > Tuesday, June 10 > Wednesday, June 11

Thoughts about the Phillips Curve Paul A. Samuelson (Paul Samuelson could not join us for this conference, yet he kindly forwarded commentary for distribution at the conference.)

Monday, June 9, 2008

5:00 p.m. Welcome and Conference Kick-Off Eric Rosengren President and Chief Executive Officer Federal Reserve Bank of Boston

The Phillips Curve at 50: What Have We Learned? Two Views

This session will review the intellectual history of the Phillips curve since A. W. Phillips' paper. The session will discuss the Phillips curve's basic insight and the reasons for its longevity. In so doing, the session will illustrate the evolution of the concept over time in response to both theoretical and empirical challenges. The session will then provide an assessment of the current "state of the art" Phillips curve, and discuss outstanding theoretical and empirical issues.

Presenters: A dialogue between John B. Taylor, Mary and Robert Raymond Professor of Economics (Stanford University) and Robert M. Solow, Institute Professor of Economics (Massachusetts Institute of Technology) Moderator: N. Gregory Mankiw, Robert M. Beren Professor of Economics (Harvard University) General Discussion

6:30 p.m. Reception
7:15 p.m.

Dinner and Keynote Address

The Honorable Ben Bernanke Chairman Board of Governors of the Federal Reserve System

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Tuesday, June 10, 2008

7:00 a.m. Breakfast
8:00 a.m. Opening Remarks Eric Rosengren President and Chief Executive Officer Federal Reserve Bank of Boston

8:30 a.m.

Forecasting Inflation

This session will focus on the properties of inflation and on the usefulness of the Phillips curve in forecasting inflation. How much does the Phillips curve improve upon alternative (e.g., univariate) approaches to forecasting inflation? How stable is the Phillips curve relationship? What measures of activity are most helpful in forecasting inflation? Do measures of global capacity help? What is the role of relative price shocks? If not the Phillips curve, what else?

Presenters: James H. Stock, Professor Economics (Harvard University) and Mark W. Watson, Howard Harrison and Gabrielle Snyder Beck Professor of Economics and Public Affairs (Princeton University)

Discussants: Adrian R. Pagan, Professor of Economics (Queensland University of Technology) and Lucrezia Reichlin, Director General Research (European Central Bank)

Moderator: The Honorable Frederic S. Mishkin, Governor (Board of Governors of the Federal Reserve System)

General Discussion

10:15 a.m.

The Labor Market and the Phillips Curve

This session will explore the links between labor market developments and the wage and price versions of the Phillips curve. Is the relationship between wage growth and the unemployment rate robust? Or has the inflation-unemployment trade-off improved in recent years? If so, can we identify the underlying reasons? How have changes in labor market institutions, productivity developments, and other structural shifts in the economy contributed? Finally, how important are wage movements in determining inflation?

Presenter: William T. Dickens, Thomas C. Schelling Visiting Professor (University of Maryland) Discussants: Olivier Blanchard, Class of 1941 Professor of Economics (MIT) and Christopher Pissarides, Norman Sosnow Chair in Economics (London School of Economics)

Moderator: Alice M. Rivlin, Economics Studies Director (The Brookings Institution)

General Discussion

12:00 p.m.

Inflation Expectations

Inflation expectations play a crucial role in the Phillips curve equation. This session will discuss different ways that economic agents might form and economists might specify inflation expectations within a Phillips curve framework. The session will explore how these different approaches affect apparent inflation dynamics and will assess the empirical relevance of different specifications of inflation expectations. In so doing, the session will also comment on the relevant horizon for the formation of inflation expectations and the role of learning, survey data and central bank communications. How, for instance, does inflation targeting affect the development of inflation expectations?

Presenter: Christopher A. Sims, Harold H. Helm '20 Professor of Economics and Banking (Princeton University) Discussant: Michael T. Kiley, Assistant Director, Division of Research and Statistics (Board of Governors of the Federal Reserve System) and Athanasios Orphanides, Governor (Central Bank of Cyprus)

Moderator: Richard Clarida, C. Lowell Harriss Professor of Economics (Columbia University)

General Discussion

1:00 p.m. Lunch and Afternoon Break
6:30 p.m.

Reception and Dinner

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Wednesday, June 11, 2008

7:00 a.m. Breakfast

8:00 a.m.

Evidence on Price Determination

This session will examine micro evidence on current price setting practices and how those practices have evolved over time and vary across countries. It will discuss the role of market structures, institutions, technology, and expectations in determining the frequency with which firms change prices and the criteria they use in setting them. How do firms form their expectations about future inflation and other economic conditions, for instance? Does behavioral economics offer any insights? What are the implications for how economists should specify and interpret the Phillips Curve?

Presenters: Frank R. Smets, Deputy Director General (European Central Bank)

Discussants: Robert G. King, Professor of Economics (Boston University) and Virgiliu Midrigan, Assistant Professor of Economics (New York University)

Moderator: Stephen G. Cecchetti, Rosenberg Professor of Global Finance (Brandeis International Business School)

General Discussion

9:45 a.m.

Is the Phillips Curve Vertical in the Long Run?

This session will explore the evidence for a long-run vertical Phillips curve. The view that aggregate demand does not influence long-run unemployment trends is a central tenet of monetary policymaking. Yet "hysteresis" could cause aggregate demand to have long-run effects on unemployment. Is there robust evidence that fluctuations at the business cycle frequency have an impact on the medium and long term outcomes for unemployment? If so, what are the implications for the conduct of monetary policy and the choice of an inflation target?

Presenter: Laurence Ball, Professor of Economics (Johns Hopkins University) Discussants: V.V. Chari, Paul W. Frenzel Land Grant Professor of Liberal Arts (University of Minnesota) and Jordi Gali, Director, Centre de Recerca en Economia Internacional (Universitat Pompeu Fabra)

Moderator: Jeff Fuhrer, Executive Vice President and Director of Research (Federal Reserve Bank of Boston)

General Discussion

11:30 a.m.

Lessons for Central Bankers - A Panel

Current and former central bankers and finance ministers from around the world will discuss their use of the Phillips curve in policymaking. In particular, they will comment on how much they rely on a Phillips curve relationship to conduct policy, whether their reliance on a Phillips curve relationship has changed over time, and what alternative frameworks they find useful for forecasting inflation and for communicating with the public. What are the real-time and political challenges that the Phillips curve approach imposes?

Panelists: Stanley Fischer, Governor (Bank of Israel), The Honorable Donald L. Kohn, Vice Chair (Board of Governors of the Federal Reserve System), Jurgen Stark, Member of the Executive Board (European Central Bank), and Lars E.O. Svensson, Deputy Governor (Sveriges Riksbank)

Moderator: Allan H. Meltzer, The Allen H. Meltzer University Professor of Political Economy (Carnegie Mellon University)