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The Phillips curve, parameter instability and the Lucas critique

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  • Paul Turner

Abstract

Empirical estimation of Phillips curve relationships typically indicates the presence of parameter instability. This is argued to be due to the fact that the parameters of these equations are reduced form rather than structural parameters. Estimation of a Phillips curve model by methods which allow for time-varying parameters permits investigation of the nature and timing of the structural breaks which generate instability. This paper estimates such a model by the Kalman filter using quarterly data over the period 1972.4 to 1993.3. We find evidence of a gradual decline in the private sector's assessment of the steady-state inflation rate during the 1980s, but little evidence of the sort of dramatic regime shift predicted by some of the more extreme rational expectations models.

Suggested Citation

  • Paul Turner, 1997. "The Phillips curve, parameter instability and the Lucas critique," Applied Economics, Taylor & Francis Journals, vol. 29(1), pages 7-10.
    • Handle: RePEc:taf:applec:v:29:y:1997:i:1:p:7-10
    DOI: 10.1080/000368497327344
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    References listed on IDEAS

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    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    2. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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    Cited by:

    1. Shahbaz, Muhammad & Islam , Faridul & Shabbir, Muhammad Shahbaz, 2012. "Phillips Curve in a Small Open Economy: A Time Series Exploration of North Cyprus," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 35(4), pages 113-130, December.
    2. Ernest Gnan & Maria Teresa Valderrama, 2006. "Globalization, Inflation and Monetary Policy," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 37-54.
    3. Imen Kobbi & Foued-Badr Gabsi, 2017. "The Nonlinearity of the New Keynesian Phillips Curve: The Case of Tunisia," Economies, MDPI, vol. 5(3), pages 1-12, July.
    4. Mihaela Simionescu, 2014. "Testing The Existence And Stability Of Phillips Curve In Romania," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 10(1), pages 67-74.
    5. Malikane, Christopher, 2014. "Traditional Inflation Dynamics," MPRA Paper 61427, University Library of Munich, Germany.

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