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Brad DeLong's Grasping Reality 2020-01-14 00:29:38

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Peter Jorgensen and Kevin J. Lansing: Anchored Inflation Expectations and the Flatter Phillips Curve https://www.frbsf.org/economic-research/files/wp2019-27.pdf: 'Conventional versions of the Phillips curve cannot account for inflation dynamics during and after the U.S. Great Recession, leading many to conclude that the Phillips curve relationship has weakened or even disappeared. We show that if agents solve a signal extraction problem to disentangle temporary versus permanent shocks to inflation, then agents' inflation expectations should have become more anchored over the Great Moderation period. An estimated New Keynesian Phillips curve that accounts for the increased anchoring of expected inflation exhibits a stable slope coefficient over the period 1960 to 2019. Out-of-sample

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Peter Jorgensen and Kevin J. Lansing: Anchored Inflation Expectations and the Flatter Phillips Curve https://www.frbsf.org/economic-research/files/wp2019-27.pdf: 'Conventional versions of the Phillips curve cannot account for inflation dynamics during and after the U.S. Great Recession, leading many to conclude that the Phillips curve relationship has weakened or even disappeared. We show that if agents solve a signal extraction problem to disentangle temporary versus permanent shocks to inflation, then agents' inflation expectations should have become more anchored over the Great Moderation period. An estimated New Keynesian Phillips curve that accounts for the increased anchoring of expected inflation exhibits a stable slope coefficient over the period 1960 to 2019. Out-of-sample forecasts show that this model can account for the missing disinflation during the U.S. Great Recession and the missing inflation during the subsequent recovery. We use a simple three-equation New Keynesian model to show that an increase in the Taylor rule coefficient on inflation (or the output gap) serves to endogenously anchor agents subjective inflation expectations and thereby flatten the reduced-form Phillips curve...

Bradford DeLong
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

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