Estimates of the Inflation versus Unemployment Tradeoff that are not Model Dependent

Abstract

For governments who want to improve their economies via fiscal, monetary, trade or exchange rate policies, the tradeoff between the inflation rate and the unemployment rate is extremely important. This tradeoff has become known as the Phillips curve. Among economists there is no consensus on how to model and estimate the Phillips curve. Ideally, all the factors that could affect the Aggregate Supply and Aggregate Demand curves should be included in the model including exchange rates, transportation costs, infrastructure, weather, income distribution, etc. No researcher has created a model that could not be criticized for omitting some important variables. This paper use Bi-Directional Reiterative Truncated Least Squares, a statistical technique that solves the omitted variables problem, to estimate the tradeoff between inflation and unemployment for 34 countries between 2002 and 2017. I find that this tradeoff varies noticeably from country to country in a given year, but that many of these tradeoffs move in the same direction over time. This common direction of movement implies that the international context for the vast majority of the countries studied is affecting the inflation versus unemployment tradeoff.

Variable Slope Forecasting Methods and COVID-19 Risk

“…In order to use traditional statistical techniques to estimate the Phillips curve, one would need to include all the forces that could shift the aggregate supply and the aggregate demand curves, including "changes in technology, cost of inputs, transportation costs, the environment (including weather, infrastructure, and institutions), fiscal policy, monetary policy, trade policy, exchange rates, income distribution, attitudes toward debt, producer and consumer expectations on growth, inflation, employment, income, and profits, etc.". (Leightner 2020). Building and estimating a model that includes all those forces is impossible.…”

“…Building and estimating a model that includes all those forces is impossible. However, Leightner (2020) used one of the techniques explained in this paper to estimate the tradeoff between inflation and unemployment for 34 countries between 2002 and 2017. The estimates he produced required data solely on inflation and unemployment.…”