August 6, 2008
Recent research indicates that there have been fund amental changes in the way the economy works since the mid-1980s, including a reduction in the volatility of real GDP growth and lower rates of inflation and unemployment. Those changes have the potential to alter the inflation-unemployment tradeoff underlying the Phillips curve relationship and, consequently, the estimate of the NAIRU. This paper presents updated empirical estimates of the Philips curve and the NAIRU and explores the possibility that structural changes in the economy have shifted the underlying relationships. The empirical results suggest that the structure of the Phillips curve has changed during the past 20 or so years. Although full-sample regressions appear to be satisfactory, estimates that allow for the possibility of structural change in the equations suggest a much weaker relationship between inflation and unemployment during the past two decades compared to the early part of the sample. In addition, the results suggest that the level of the NAIRU has declined during the past 20 years.