Jonathon Hazell on Phillips Curves, Wage Rigidity, and How to Measure R-Star
Jan 22, 2024
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Jonathon Hazell, an assistant professor of economics at the London School of Economics, joins David Beckworth on Macro Musings to discuss Phillips curves, wage rigidity, and measuring R-star. They delve into topics such as viewing recent inflation, measuring the natural rate, downward wage rigidity, and more.
Inflation expectations play a significant role in shaping inflation rates.
Regional data is crucial for understanding the dynamics of the Phillips curve.
Downward wage rigidity exists for new hires, challenging the conventional view.
Deep dives
The Phillips Curve and Inflation Expectations
This podcast episode explores the relationship between the Phillips curve and inflation expectations. The podcast discusses how inflation expectations, along with other factors such as slack in the economy and supply shocks, can impact inflation. It highlights the importance of understanding the role of inflation expectations in shaping inflation rates. The episode also mentions the historical context, specifically the Volcker disinflation period, to explain the dynamics between inflation and unemployment.
Regional Data and the Flat Phillips Curve
The podcast discusses a research paper that uses regional data to investigate the slope of the Phillips curve. The researchers found that after controlling for inflation expectations, the relationship between unemployment and inflation was relatively weak and stable over time. This suggests that the Phillips curve, accounting for inflation expectations, is flat, indicating that changes in unemployment have only a small impact on inflation. The podcast highlights the significance of regional data in understanding the dynamics of the Phillips curve.
The Role of Inflation Expectations and Demand Shocks
The episode delves into the role of inflation expectations and demand shocks in shaping inflation rates. It explains that while inflation expectations play a significant role in influencing inflation, the recent period of high inflation was likely driven by a massive demand shock. The large fiscal stimulus, along with other factors, has contributed to the increase in inflation. The podcast acknowledges the complexity of understanding these dynamics and emphasizes the ongoing debate regarding the slope of the Phillips curve and the influence of inflation expectations.
Implications for Monetary Policy
The podcast episode concludes by discussing the implications of the findings for monetary policy. It suggests that the importance of inflation expectations in shaping inflation rates highlights the need for central banks to anchor inflation expectations effectively. Additionally, the discussion touches on the challenges faced by policymakers in navigating the trade-offs between inflation and unemployment. The findings also prompt reflection on the effectiveness of fiscal stimulus and its impact on inflation rates.
Measuring the Natural Rate of Interest
The podcast episode discusses the concept of the natural rate of interest, or R-Star, and the challenges associated with measuring it. Traditional measures of R-Star, such as the famous Laubach-Williams measure, rely on econometric techniques that require accurate specification of the economy's structure. However, these measures often provide different point estimates and have large standard errors. To overcome these challenges, the podcast introduces a novel approach using natural experiments and micro-data to measure the long-run rate of return on UK housing. The findings suggest that the long-run rate of return on housing has been declining over time. Additionally, the research indicates that interest rates and rates of return on housing are likely to remain low in the future.
Downward Wage Rigidity for New Hires
The podcast episode explores the concept of downward wage rigidity, particularly for new hires. It challenges the conventional view that wages for new hires are more flexible than wages for existing employees. Using data from online vacancy postings, the researchers find evidence of downward wage rigidity for new hires, indicating that their wages rarely fall during contractions. The findings suggest that internal equity considerations, fairness concerns, and standardized pay scales within firms might contribute to this phenomenon. These insights provide a deeper understanding of wage dynamics during recessions and have implications for macroeconomic theory and policymaking.
Jonathon Hazell is an assistant professor of economics at the London School of Economics. Jonathon joins Macro Musings to talk about Phillips curves, R-stars, and nominal wage rigidity. Specifically, Jonathon and David also discuss the how to view the recent inflation experience, how to measure the natural rate using natural experiments, the downward nature of wage rigidity, and a lot more.
