Researchers at the SF Federal Reserve Bank published a report today arguing that, in serious downturns (but not in normal times), the beleaguered Phillips curve proves useful. The Phillips curve, of course, shows an inverse relationship between employment and inflation – a concept which garnered increased scepticism, inside and outside the FOMC, over the past few decades as researchers struggled to find empirical evidence showing the link.
But, the researchers say, now that we’re in a deep recession, the Phillips curve is, again, useful. “Our findings suggest that the high level of the unemployment rate over the past year likely contributed to the substantial declines in the inflation rate, as the Phillips curve would predict,” the researchers wrote.
They also join the chorus of Fed employees who warn of the dangers of increased oversight of the institution. “To keep inflation expectations under control, it is essential to maintain the Fed’s credibility and the independence of monetary policy from politics,” they wrote.
