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It is critical for the Federal Reserve to stabilize inflation expectations in order to achieve their desired inflation target. Yet, the empirical evidence documents that consumers and professional forecasters often have different views about the expected future inflation rate. Previous research demonstrates that greater newspaper coverage on inflation closes the gap between consumers' and professionals’ inflation forecasts. However, the literature only examines newspaper references to inflation, while more general references to the Fed have been overlooked. This paper fills this void, where we find some evidence that newspaper references to the Fed close the gap between consumer and professional inflation forecasts, although this effect varies by newspaper and by the way in which news coverage is measured.

This paper examines the recent behavior of core inflation in the United States. We specify a simple Phillips curve based on the assumptions that inflation expectations are fully anchored at the Federal Reserve’s target, and that labor-market slack is captured by the level of short-term unemployment. This equation explains inflation behavior since 2000, including the failure of high total unemployment since 2008 to reduce inflation greatly. The fit of our equation is especially good when we measure core inflation with the Cleveland Fed’s series on weighted median inflation. We also propose a more general Phillips curve in which core inflation depends on short-term unemployment and on expected inflation as measured by the Survey of Professional Forecasters. This specification fits U.S. inflation since 1985, including both the anchored-expectations period of the 2000s and the preceding period when expectations were determined by past levels of inflation.

Inflation in Europe fell sharply after the Great Recession in 2008 due to the severity of the financial crisis. However, the post-recession sharp decline in inflation in 2012 was not anticipated by most observers. This paper seeks to explain this behavior of eurozone core inflation, which we do by estimating a Phillips curve with professional forecasters' inflation expectations. Doing so produces inflation predictions that closely match the observed behavior of core inflation, whereas lagged expectations fail to predict the 2012 disinflation. Furthermore, we find that short-term inflation expectations are most relevant for the euro area, rather than longer-term ones. Indeed the evidence suggests that the ECB's inflation anchor of 2% has weakened since the Great Recession, and is something that should cause policymakers a lot of concern.

This paper examines the impact of globalization on inflation in developing and emerging economies. We estimate both traditional and open-economy versions of the Phillips curve for all developing economies by incorporating both domestic and foreign output gaps. We find mixed results: whether globalization has significantly affected domestic inflation in developing countries depends on the measure of inflation. Under GDP deflator inflation, there has been a significant change in the output-inflation tradeoff, but CPI inflation suggests otherwise. This highlights the importance of paying closer attention to the measure of inflation implemented, which is something that the current literature neglects to do.

Previous research finds that the analysis of sacrifice ratios–namely, identifying disinflation episodes, calculating the sacrifice ratio, and looking at its determinants–changes substantially when one moves from headline to core inflation. This paper examines whether similar findings are obtained when examining benefice ratios, and we find arguably even greater differences. Specifically, we see that headline inflation identifies far more inflationary episodes since the 1990s than core inflation does. Furthermore, Jordan’s (1997) argument that the speed of inflation is a negative and significant determinant of benefice ratios does not hold when we move from headline to core inflation, both within the U.S. and also across the OECD. We also find strong evidence that the initial level of GDP at the onset of an inflationary episode matters. In particular, output gains from accelerating inflation appear only to be beneficial for OECD countries that start with a low level of GDP. Conversely, countries that start with a high level of GDP should not pursue additional output gains from allowing a rise in inflation.

This paper asks whether a textbook Phillips curve can explain the behavior of core inflation in the euro area. A critical feature of the analysis is that we measure core inflation with the weighted median of industry inflation rates, which is less volatile than the common measure of inflation excluding food and energy prices. We find that fluctuations in core inflation since the creation of the euro are well explained by three factors: expected inflation (as measured by surveys of forecasters); the output gap (as measured by the Organisation for Economic Co‐operation and Development); and the pass‐through of movements in headline inflation. Our specification resolves the puzzle of a “missing disinflation” after the Great Recession, and it diminishes the puzzle of a “missing inflation” during the recent economic recovery.

For decades, textbooks have explained inflation behavior with Friedman (1968)’s Phillips curve: the inflation rate depends on expected inflation and the deviation of unemployment from its natural rate. Yet this theory has always been controversial, and skepticism has been rampant in the decade since the 2008 financial crisis. For several years following the crisis, researchers such as Stock (2011) and Coibion and Gorodnichenko (2015) puzzled over a “missing deflation:” inflation did not fall much despite a sharp rise in the unemployment rate. More recently, as the economy has approached full employment, economists have puzzled over the failure of inflation to rise toward the Federal Reserve’s target of 2 percent. According to Bernstein (2017), recent low inflation is “puzzle #1 in economics.”

Markets across the world pay enormous attention to every economic forecast made by Federal Reserve governors, particularly those from the chair. This article develops a new way that the academic literature can assess the accuracy of these Federal Reserve forecasts. In particular, our proposed method allows for both general and specific predictions to be assessed, while also accounting for the macroeconomic volatility that prevails at the time of the forecast. To develop this measure, we expand upon a methodology proposed by the Wall Street Journal to score the accuracy of forecasts made by the Fed. Our results show that Alan Greenspan was consistently the most accurate forecaster among Fed governors, while the most recent chair in our sample, Janet Yellen, has performed relatively poorly. More generally, we find that the chairs have become less accurate over time with their forecasts and have also tended to make fewer specific predictions.

What is the state of macroeconomics? We answer this question by hand collecting information about the epistemological approaches, theoretical and empirical methods, and data sources used by macroeconomists in their research. During the past 40 years there has been an increasing reliance on mathematical theory, particularly DSGE models, with theory-based papers now occupying the majority of space in macro journals. This shift is mirrored by a decline in the use of empirical falsification methods testing theoretical predictions. Microeconometric techniques have displaced time series methods, and empirical papers increasingly rely on micro and proprietary data sources. We document a decline and subsequent resurgence of financial frictions appearing in macro theory. Finally, we find that topics outside of macroeconomics are studied in more than three fourths of macro field journal publications.

This paper measures sacrifice ratios for all countries in the world over an approximately forty year time period, in addition to exploring the determinants of worldwide sacrifice ratios. We test the most commonly-cited determinants: the speed of disinflation, openness, inflation targeting, central bank independence, and political factors for both OECD and non-OECD countries. We find that the speed of disinflation is the most important determinant of OECD sacrifice ratios, but puzzlingly has no effect on non-OECD nations' disinflation costs. Instead we find evidence that greater central bank independence and more openness are associated with lower non-OECD sacrifice ratios. We also find that the ratio of government debt to GDP – a variable that is not important when it comes to OECD countries – is highly significant for non-OECD economies. Specifically, we find that higher indebtedness is associated with lower sacrifice ratios in non-OECD nations, suggesting that greater levels of debt do not lead to higher expectations of inflation. Furthermore we find evidence that the negative impact of debt on non-OECD sacrifice ratios is being driven by middle income economies.

The existing body of research that measures the sacrifice ratio and the determinants of the sacrifice ratio has crucially identified several disinflation episodes across many different countries, while also overwhelmingly finding evidence in favor of the “cold-turkey” approach to disinflation. However all previous studies in this topic are based exclusively on headline measures of inflation. In this paper we investigate what happens if we instead use core inflation to both identify disinflation episodes and measure the sacrifice ratio. Several important differences emerge: for example, headline inflation produces more disinflation episodes than core inflation does – something which is particularly conspicuous during the Great Recession – and episodes that are generally shorter in length. We also find that the argument in favor of the cold-turkey approach to reducing inflation disappears when combining the use of core inflation with sacrifice ratio measures that allow for varying persistent effects on output of disinflation.

During the past two decades, a growing body of research has explored the implications of increased trade and financial openness for the relationship between output and inflation. This paper reviews proposed theoretical channels through which the degree of openness might ultimately affect the output-inflation trade-off and surveys the empirical studies that have sought to determine the net effect of greater openness on this trade-off. In addition, the paper utilizes a single cross-country data set to evaluate, taking into account recent developments in the literature, the likely sign and significance of this net effect. In particular, we find current data imply that there is a negative and significant relationship between openness and the sacrifice ratio, regardless of the transmission channel that is proposed.

Among the few papers that have examined the determinants of inflation dynamics in mainland China, the majority of those that have investigated this matter argue that the traditional Phillips curve does not fit China's data. Some authors, however, conclude that the New Keynesian Phillips Curve does a better job of describing Chinese inflation behaviour in recent decades. This paper conducts an analysis of China's inflation behaviour from the late 1980s onwards by estimating both traditional and new Phillips curves using improved econometric techniques. We find that the New Keynesian Phillips Curve performs poorly in explaining China's inflation behaviour, whereas the traditional ‘old’ Phillips curve does significantly better.

Recent research has examined the link between rising educational attainment and its impact on inflation, via the equilibrium rate of unemployment. Studies such as Daly et al. (2007) have found that a measure of aggregate unemployment that has been adjusted for changes in the educational structure of the U.S. performs well in the Phillips curve, and that accounting for the level of education allows for superior estimation of group-specific Phillips curves. In this paper we consider what happens when the aggregate model is applied to a broader sample of countries, including both advanced and developing economies. We find that the education-adjusted unemployment gap does little to help estimate the inflation-unemployment tradeoff for a wider range of countries. Moreover, we find little evidence of a Phillips curve over the period of 1999 to 2008 for the developing countries in our sample. We also implement a gender-adjusted unemployment gap, and find that this variable is significant, but only because labor force shares have not changed substantially during the time period tested.

One of the unofficial goals of the formation of the European Monetary Union (EMU) was to enable member nations to keep inflation at a low and stable rate, while minimising the costs associated with trying to reduce the rate of inflation. This paper seeks to examine whether the formation of EMU has enabled the euro area countries to reduce the output losses that are associated with disinflations, which are captured by the sacrifice ratio. We find that the formation of EMU has not reduced the output costs of disinflation. Moreover, we find that the movement towards EMU following the Delors Report in 1989 coincides with greater output losses for eurozone countries that were undergoing disinflation. This suggests that EMU has not made it less costly for euro area countries to reduce their rates of inflation, and any achievement of price stability has only occurred at high cost.

Since the 1970s, there have been substantial financial reforms across the world, however little research has been devoted to studying the convergence path of these reforms. While Abiad and Mody (Am Econ Rev 95:66–88, 2005) find that there is movement towards a global ‘norm’ of financial reform, their findings are based upon a cross-sectional approach that has been widely criticized in the literature. In this paper we offer new time-series evidence on the convergence of financial reforms both across and within regions, which can also act as a metric to measure the degree of globalization among countries’ financial systems. We find that some regions of the world have fully converged, but the advanced economies and Sub-Saharan Africa are not converging. In addition, while most countries have fully converged within their own region, notable exceptions are also identified. These results suggest that while financial reforms have largely become homogenized, important distinctions still remain.

This paper estimates the price–marginal cost markup for U.S. manufacturing using a new methodology. Most existing techniques of estimating the markup are a variant on the Hall (1988) framework that involves manipulating the Solow Residual. However, this paper argues that this notion is based on the unreasonable assumption that labor can be costlessly adjusted at a fixed wage rate. By relaxing this assumption we are able to derive a generalized markup index, which, when estimated using manufacturing data, is highly countercyclical and decreasing in trend since the 1960s. When we then seek to explain what causes the manufacturing markup to behave in this way, the most important determinant is the share of imported goods in the industry. Thus, increasing foreign competition in manufacturing has led to a decline in the industry's markup over time.

[Author Affiliation]Sandeep Mazumder, , , , mazumds@wfu.edu[Acknowledgment]I wish to thank the anonymous referees for their valuable comments and suggestions that helped shape this manuscript.1. IntroductionOn June 1, 1998, the European Central Bank came into being with the goal of maintaining price stability in the euro zone.1 The ability to describe inflation as accurately as possible has long been a key goal that macroeconomists pursue, and in light of the introduction of the euro currency in the late 1990s, this topic is particularly pertinent in Europe. To this end, recent research has devoted a great deal of time to the New Keynesian Phillips Curve (NKPC), a model that examines price setting behavior based on nominal rigidities founded on the work of authors such as Taylor (1980) and Calvo (1983). This model has not been without controversy, but even so it remains a workhorse of macroeconomics, perhaps attributable to the lack of a better alternative.In particular, the model is thought to have first seen genuine empirical success when Gali and Gertler (1999) estimated the NKPC using U.S. data and found that the model describes changes in U.S. prices considerably well. Indeed, Gali, Gertler, and Lopez-Salido (2001) conduct a similar exercise using European inflation data and find that the NKPC is even more applicable to the euro area than for the United States over the period from the 1970s to the latter 1990s. One of the key innovations of these articles is that the labor income share (equivalently, real unit labor costs) is used as the proxy for real marginal cost in the NKPC as opposed to previously used proxies, such as detrended real output. Following in the same vein as Gali, Gertler, and Lopez-Salido (2001), others have also found that the NKPC can be accurately used to describe inflation in Europe. For example, Rumler (2007) estimates the labor share NKPC for nine euro area countries and finds evidence in favor of the model, while Jondeau and Bihan (2005) argue that the labor share NKPC may describe European inflation dynamics well, depending on the number of leads or lags that one is willing to include into the model. Similarly, Leith and Malley (2005) use the NKPC to find greater evidence of price stickiness in Europe as compared to the United States, where the proxy for real marginal cost is labor's share of income.While some authors have questioned the empirical performance of the NKPC in Europe when using different econometric techniques (such as Bardsen, Jansen, and Nymoen 2004; Paloviita 2005; Lawless and Whelan 2007; Boug, Cappelen, and Swensen 2010), a more obvious problem remains with the approach of Gali, Gertler, and Lopez-Salido (2001) to estimating the NKPC for Europe that has not received much attention in the literature. That is, the labor income share cannot be used to proxy for real marginal cost in the NKPC if we are to address the cyclicality of real marginal cost in a manner in keeping with predictions from basic microeconomic theory. Namely, we believe that marginal cost is likely to be procyclical over the business cycle, whereas the labor income share in fact moves countercyclically. Furthermore, the labor share proxy of real marginal cost is founded on the assumption that labor input can be freely adjusted at a fixed real wage rate. The problem with this assumption is that it ignores the notion of labor adjustment costs, which is something that cannot reasonably be discounted. Specifically, one can think of labor as being the product of the number of workers in an economy and the respective number of hours that they work. Seminal work by Oi (1962) has argued that employment is not perfectly flexible in the short run, something that the derivation of the labor share marginal cost proxy does not take into account.This article reconsiders the derivation of a proxy for real marginal cost in a similar manner to that done in Gali and Gertler (1999) and Gali, Gertler, and Lopez-Salido (2001), with the crucial difference that we account for the existence of labor adjustment costs. …

The issue of whether the UK should join the European single currency has been fiercely debated for the past two decades. However little research has been devoted to forecasting hypothetical projections for important UK economic variables, assuming that the UK had in fact joined the euro at its inception in 1999. This paper focuses on estimating counterfactual series for two key macroeconomic variables: unemployment and output. We do this by estimating Phillips curves for the UK, which we then use to compute counterfactual series for what unemployment and output may have looked like for the UK had they adopted the single currency in 1999. Based on the comparison of our forecasts with observed data, we find that the UK was correct in not joining the euro; had they adopted the European single currency in 1999, unemployment would have been higher and output would have been lower.

There are many explanations of the fall in prices and production called the Great Depression of 1929–33, but this article argues that a sufficient explanation of the price fall—the Great Deflation—was the resumption of the gold convertibility of currencies at prewar parities. The value (general purchasing power) of a convertible currency must be the relative cost of producing gold and other goods, which did not change significantly between 1914 and the 1930s. Monetary and fiscal policies might have affected the timing but not the ends of the price paths that were determined by the decisions to resume.

This article addresses the issue of Phillips Curve stability between different Federal Reserve (Fed) chairmen, from the time Paul Volcker took office in the late 1970s all the way up until 2010 under the leadership of Ben Bernanke. Phillips Curves are estimated both across and within the regimes of Volcker, Greenspan and Bernanke, and thereafter we also check for the existence of potential structural breaks. The results suggest that the Phillips Curve is very much a robust macroeconomic relationship: not only across time, but across Fed chairmen as well.

The overwhelming majority of the literature that has attempted to estimate a Phillips curve for India has found that the model does not fit the data, with the notable exception of Paul (2009) . However, this paper argues that the Indian Phillips curve can be estimated using standard econometric techniques, as opposed to several special adjustments that are required in Paul (2009)’s work. Once we establish the existence of the Phillips curve in India, we examine whether the Lucas critique applies to the behavior of the model under different Reserve Bank of India (RBI) Governors. We find that there is little-to-no evidence for structural change in the model between successive RBI Governors. Hence the results demonstrate that the Phillips curve is alive and well in India, and that the Lucas critique does not apply empirically to Indian inflation–output data.

It is a well-established idea that prices are a function of marginal cost, yet estimating a reliable measure of marginal cost is difficult to do. Stock and Watson (1999) use the Phillips Curve to forecast inflation for a variety of existing activity variables that researchers commonly use to proxy for marginal cost. This paper uses a similar type of approach to examine the performance of a new candidate for the activity variable, which is marginal cost measured following the theoretical methodology of Bils (1987) , which we find to be simple yet powerful when implemented empirically. We then use the Phillips Curve to conduct pseudo out-of-sample inflation forecasts for the US using: output, unemployment, hours, the labor share, the capacity utilization rate, and the new measure of marginal cost. For almost all cases, forecast errors are lowest in the regressions with the new marginal cost variable, indicating that this new measure is an improvement over previous attempts to proxy for marginal cost.

This paper investigates the performance of the New Keynesian Phillips curve when survey forecasts of inflation are used to proxy for inflation expectations. Previous authors such as Brissimis and Magginas (2008) have applied survey measures of inflation expectations to the NKPC, and have concluded that these estimates are superior to those estimated using actual data on future inflation. However this approach employs the use of the labor income share as the proxy for real marginal cost, something which is highly problematic once we consider the countercyclicality of this variable. This paper develops and tests a procyclical marginal cost variable alongside various survey measures of inflation forecasts in the NKPC, while recognizing the problem of weak instruments that occurs when estimating the model using conventional GMM. We find that the NKPC produces a counter-intuitive negative and significant coefficient on procyclical marginal cost when surveys of inflation forecasts are used, which casts serious doubt on the empirical viability of the NKPC model, even when estimated with survey inflation forecasts.

Many researchers have found that estimating the New Keynesian Phillips Curve (NKPC) using the output gap to proxy for real marginal cost tends to produce a counter-intuitive coefficient sign in the model, whereas using the labour income share produces the expected coefficient sign. This article investigates the potential cause of this puzzle: What causes these differing signs for the coefficient for real marginal cost? We find that this coefficient sign crucially depends on the covariance between inflation and marginal cost. Moreover, this covariance in turn critically depends on the cyclicality of the marginal cost proxy that is used.

This paper examines the long-run relationship between inflation and a new measure of the price-marginal cost markup. This new markup index is derived while accounting for labor adjustment costs, which a large number of the papers that estimate the markup have ignored. We then examine the long-run relationship between this markup measure, which is estimated using U.S. manufacturing data, and inflation. We find that decreases in the markup that are associated with a percentage point increase in inflation are much smaller than previous studies have found.

This paper examines the recent behavior of core inflation in the United States. We specify a simple Phillips curve based on the assumptions that inflation expectations are fully anchored at the Federal Reserve’s target, and that labor-market slack is captured by the level of shortterm unemployment. This equation explains inflation behavior since 2000, including the failure of high total unemployment since 2008 to reduce inflation greatly. The fit of our equation is especially good when we measure core inflation with the Cleveland Fed’s series on weighted median inflation. We also propose a more general Phillips curve in which core inflation depends on short-term unemployment and on expected inflation as measured by the Survey of Professional Forecasters. This specification fits U.S. inflation since 1985, including both the anchored-expectations period of the 2000s and the preceding period when expectations were determined by past levels of inflation.

This article investigates the relationship between term limits and international conflict. Theories of political survival and diversionary war both imply term limits should play a role in international relations, whereas “permanent referendum theory,” largely motivated by work in American politics, suggests otherwise. Drawing on these theories, we formulate and test competing hypotheses regarding term limits and international crises. Using dyadic militarized interstate disputes data and information on forty-eight democracies with term limits, we uncover strong evidence to support the claim that leaders reaching final terms in office are more likely to initiate conflict than those still subject to reelection. Moreover, we find that the likelihood of conflict initiation is significantly higher during times of recession, but only in the absence of binding term limits. While binding electoral terms and economic downturns are both independently associated with increased levels of conflict initiation, in concert their conditional effects actually counteract each other.

This paper examines inflation dynamics in the United States since 1960, with a particular focus on the Great Recession. A puzzle emerges when Phillips curves estimated over 1960-2007 are ussed to predice inflation over 2008-2010: inflation should have fallen by more than it did. We resolve this puzzle with two modifications of the Phillips curve, both suggested by theories of costly price adjustment: we measure core inflation with the median CPI inflation rate, and we allow the slope of the Phillips curve to change with the level and vairance of inflation. We then examine the hypothesis of anchored inflation expectations. We find that expectations have been fully "shock-anchored" since the 1980s, while "level anchoring" has been gradual and partial, but significant. It is not clear whether expectations are sufficiently anchored to prevent deflation over the next few years. Finally, we show that the Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations.

This paper examines inflation dynamics in the Unites States since 1960, with a particular focus on the Great Recession. A puzzle emerges when Phillips curves estimated over 19602007 are used to predict inflation over 2008-2010: inflation should have fallen by more than it did. We resolve this puzzle with two modifications of the Phillips curve, both suggested by theories of costly price adjustment: we measure core inflation with the median CPI inflation rate, and we allow the slope of the Phillips curve to change with the level and variance of inflation. We then examine the hypothesis of anchored inflation expectations. We find that expectations have been fully “shock-anchored” since the 1980s, while “level anchoring” has been gradual and partial, but significant. It is not clear whether expectations are sufficiently anchored to prevent deflation over the next few years. Finally, we show that the Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations.

Several authors argue that if the labor income share is used as the proxy for real marginal cost, then the New Keynesian Phillips Curve does a good job of approximating US inflation dynamics. However, this paper argues that the labor share is not an ideal measure of real marginal cost for two reasons: it is countercyclical whereas marginal cost is likely to be procyclical, and it assumes that labor can be costlessly adjusted at a fixed real wage rate. Relaxing this assumption to a more realistic one leads to a measure of marginal cost that does turn out to be procyclical, which when tested produces results that are contradictory to the entire underlying model of the NKPC. Indeed, this paper argues that having procyclical marginal cost precludes us from even having the correct coefficient signs in the NKPC, which highlights a major problem that exists in the model.