IDEAS home Printed from https://ideas.repec.org/a/bla/obuest/v85y2023i2p269-282.html
   My bibliography  Save this article

The All‐Gap Phillips Curve

Author

Listed:
  • James McNeil
  • Gregor W. Smith

Abstract

The all‐gap Phillips curve (PC) explains inflation by expected inflation and an activity variable such as output or the unemployment rate, but with both inflation and the activity variable measured relative to their stochastic trends and thus as gaps. We study this relationship with minimal auxiliary assumptions and under rational expectations (RE). We show restrictions on an unobserved components model that identify the PC parameters, first with an autonomous output gap and second with output and inflation gaps following a VAR. For the United States, United Kingdom, and Canada both cases yield all‐gap PCs with slopes of the expected signs, but there is little support for the restrictions implied by RE.

Suggested Citation

  • James McNeil & Gregor W. Smith, 2023. "The All‐Gap Phillips Curve," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(2), pages 269-282, April.
    • Handle: RePEc:bla:obuest:v:85:y:2023:i:2:p:269-282
    DOI: 10.1111/obes.12528
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/obes.12528
    Download Restriction: no
    File URL: https://libkey.io/10.1111/obes.12528?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Tara M. Sinclair, 2009. "The Relationships between Permanent and Transitory Movements in U.S. Output and the Unemployment Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 529-542, March.
    2. Christophe Planas & Alessandro Rossi, 2004. "Can inflation data improve the real-time reliability of output gap estimates?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(1), pages 121-133.
    3. Peter N. Ireland, 2007. "Changes in the Federal Reserve's Inflation Target: Causes and Consequences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1851-1882, December.
    4. Basistha, Arabinda & Nelson, Charles R., 2007. "New measures of the output gap based on the forward-looking new Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 498-511, March.
    5. Thomas Hasenzagl & Filippo Pellegrino & Lucrezia Reichlin & Giovanni Ricco, 2022. "A Model of the Fed's View on Inflation," The Review of Economics and Statistics, MIT Press, vol. 104(4), pages 686-704, October.
    6. Trenkler, Carsten & Weber, Enzo, 2016. "On the identification of multivariate correlated unobserved components models," Economics Letters, Elsevier, vol. 138(C), pages 15-18.
    7. Richard K. Crump & Stefano Eusepi & Marc Giannoni & Aysegul Sahin, 2019. "A Unified Approach to Measuring u," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 50(1 (Spring), pages 143-238.
    8. Planas, Christophe & Rossi, Alessandro & Fiorentini, Gabriele, 2008. "Bayesian Analysis of the Output Gap," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 18-32, January.
    9. Jeremy M. Piger & Robert H. Rasche, 2008. "Inflation: Do Expectations Trump the Gap?," International Journal of Central Banking, International Journal of Central Banking, vol. 4(4), pages 85-116, December.
    10. Michael Woodford, 2008. "How Important Is Money in the Conduct of Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1561-1598, December.
    11. Thomas Laubach, 2001. "Measuring The NAIRU: Evidence From Seven Economies," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 218-231, May.
    12. Mitra, Sinchan & Sinclair, Tara M., 2012. "Output Fluctuations In The G-7: An Unobserved Components Approach," Macroeconomic Dynamics, Cambridge University Press, vol. 16(3), pages 396-422, June.
    13. Berger, Tino & Everaert, Gerdie & Vierke, Hauke, 2016. "Testing for time variation in an unobserved components model for the U.S. economy," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 179-208.
    14. Morley, James & Piger, Jeremy & Rasche, Robert, 2015. "Inflation In The G7: Mind The Gap(S)?," Macroeconomic Dynamics, Cambridge University Press, vol. 19(4), pages 883-912, June.
    15. James H. Stock & Mark W. Watson, 2007. "Erratum to "Why Has U.S. Inflation Become Harder to Forecast?"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1849-1849, October.
    16. Panovska, Irina & Ramamurthy, Srikanth, 2022. "Decomposing the output gap with inflation learning," Journal of Economic Dynamics and Control, Elsevier, vol. 136(C).
    17. James H. Stock & Mark W. Watson, 2007. "Erratum to “Why Has U.S. Inflation Become Harder to Forecast?”," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1849-1849, October.
    18. Shih‐Tang Hwu & Chang‐Jin Kim, 2019. "Estimating Trend Inflation Based on Unobserved Components Model: Is It Correlated with the Inflation Gap?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(8), pages 2305-2319, December.
    19. Harvey, A., 2008. "Modeling the Phillips curve with unobserved components," Cambridge Working Papers in Economics 0805, Faculty of Economics, University of Cambridge.
    20. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-368, July.
    21. Beveridge, Stephen & Nelson, Charles R., 1981. "A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the `business cycle'," Journal of Monetary Economics, Elsevier, vol. 7(2), pages 151-174.
    22. James C. Morley & Charles R. Nelson & Eric Zivot, 2003. "Why Are the Beveridge-Nelson and Unobserved-Components Decompositions of GDP So Different?," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 235-243, May.
    23. Guido Ascari & Argia M. Sbordone, 2014. "The Macroeconomics of Trend Inflation," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 679-739, September.
    24. Morley, James C., 2011. "The Two Interpretations Of The Beveridge–Nelson Decomposition," Macroeconomic Dynamics, Cambridge University Press, vol. 15(3), pages 419-439, June.
    25. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, February.
    26. Chang‐Jin Kim & Pym Manopimoke & Charles R. Nelson, 2014. "Trend Inflation and the Nature of Structural Breaks in the New Keynesian Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(2-3), pages 253-266, March.
    27. Charles R. Nelson & Jaejoon Lee, 2007. "Expectation horizon and the Phillips Curve: the solution to an empirical puzzle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 161-178.
    28. Timothy Cogley & Argia M. Sbordone, 2008. "Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve," American Economic Review, American Economic Association, vol. 98(5), pages 2101-2126, December.
    29. James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Berger, Tino & Everaert, Gerdie & Vierke, Hauke, 2016. "Testing for time variation in an unobserved components model for the U.S. economy," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 179-208.
    2. Panovska, Irina & Ramamurthy, Srikanth, 2022. "Decomposing the output gap with inflation learning," Journal of Economic Dynamics and Control, Elsevier, vol. 136(C).
    3. James M. Nason & Gregor W. Smith, 2021. "Measuring the slowly evolving trend in US inflation with professional forecasts," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(1), pages 1-17, January.
    4. Mengheng Li & Ivan Mendieta-Munoz, 2019. "The multivariate simultaneous unobserved components model and identification via heteroskedasticity," Working Paper Series 2019/08, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    5. Pym Manopimoke, 2015. "Globalization and International Inflation Dynamics: The Role of the Global Output Gap," PIER Discussion Papers 8, Puey Ungphakorn Institute for Economic Research.
    6. Saeed Zaman, 2021. "A Unified Framework to Estimate Macroeconomic Stars," Working Papers 21-23R2, Federal Reserve Bank of Cleveland, revised 31 May 2024.
    7. Thomas Hasenzagl & Filippo Pellegrino & Lucrezia Reichlin & Giovanni Ricco, 2022. "A Model of the Fed's View on Inflation," The Review of Economics and Statistics, MIT Press, vol. 104(4), pages 686-704, October.
    8. Chang‐Jin Kim & Pym Manopimoke & Charles R. Nelson, 2014. "Trend Inflation and the Nature of Structural Breaks in the New Keynesian Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(2-3), pages 253-266, March.
    9. Angelia L. Grant & Joshua C.C. Chan, 2017. "A Bayesian Model Comparison for Trend‐Cycle Decompositions of Output," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(2-3), pages 525-552, March.
    10. Mengheng Li & Irma Hindrayanto, 2018. "Looking for the stars: Estimating the natural rate of interest," Working Paper Series 51, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    11. Michael O’Grady, 2019. "Estimating the Output, Inflation and Unemployment Gaps in Ireland using Bayesian Model Averaging," The Economic and Social Review, Economic and Social Studies, vol. 50(1), pages 35-76.
    12. Manuel González-Astudillo & John M. Roberts, 2022. "When are trend–cycle decompositions of GDP reliable?," Empirical Economics, Springer, vol. 62(5), pages 2417-2460, May.
    13. Guido Ascari & Paolo Bonomolo & Qazi Haque, 2023. "The Long-Run Phillips Curve is ... a Curve," Working Papers 789, DNB.
    14. Yunjong Eo & Luis Uzeda & Benjamin Wong, 2023. "Understanding trend inflation through the lens of the goods and services sectors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(5), pages 751-766, August.
    15. McNeil, James, 2023. "Monetary policy and the term structure of inflation expectations with information frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    16. Bradley, Michael D. & Jansen, Dennis W. & Sinclair, Tara M., 2015. "How Well Does “Core” Inflation Capture Permanent Price Changes?," Macroeconomic Dynamics, Cambridge University Press, vol. 19(4), pages 791-815, June.
    17. Florian Huber & Daniel Kaufmann, 2020. "Trend Fundamentals and Exchange Rate Dynamics," Economica, London School of Economics and Political Science, vol. 87(348), pages 1016-1036, October.
    18. Takushi Kurozumi & Willem Van Zandweghe, 2023. "A Theory of Intrinsic Inflation Persistence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(8), pages 1961-2000, December.
    19. T. Berger, 2008. "Estimating Europe’s Natural Rates from a forward-looking Phillips curve," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 08/498, Ghent University, Faculty of Economics and Business Administration.
    20. Kamber, Güneş & Wong, Benjamin, 2020. "Global factors and trend inflation," Journal of International Economics, Elsevier, vol. 122(C).

    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:obuest:v:85:y:2023:i:2:p:269-282. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/sfeixuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.