Bullard Spars With Mishkin Over Lifeless Body of Phillips Curve

Yuko Takeo

16 Oct 2019, 04:11 PM IST

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Federal Reserve policy maker James Bullard and his former colleague Frederic Mishkin sparred in London over the death of the Phillips Curve, diverging on whether the phenomenon it describes has disappeared.

Speaking out against the St. Louis Fed president’s previous assertion that two decades of empirical evidence show no correlation between the rate of unemployment and inflation, Mishkin said state and local data suggests otherwise.

“Here, you actually see that the Phillips Curve is as strong as it ever was,” the former Fed governor said, speaking at the Monetary and Financial Policy Conference on Tuesday. Mishkin added that assuming it to be dead is dangerous, as that encourages the view that “we can keep goosing up the economy and not worry about it.”

Bullard Spars With Mishkin Over Lifeless Body of Phillips Curve

Bullard, quipping that the exchange was reminiscent of a Fed policy discussion, responded that he still believes his reading of the data is right, and that better monetary policy over the last 20 years has led to a flattening of the curve -- a stance he’s taken in the past.

“The empirical Phillips Curve essentially has a slope of zero over the last 20 years. If it was some other theory and you had that kind of evidence, you would throw out that theory.”

Bullard cautioned that the phenomenon isn’t entirely dead.

“The empirical Phillips Curve looks like it’s zero, but the structural Phillips Curve is still alive and well. I think that’s a very tangible thing.”

The argument that the Phillips Curve is alive but invisible has been running in central-banking circles for a couple of years, addressed by policy makers including the Bank of England’s Silvana Tenreyro earlier this year. It effectively says monetary policy that targets inflation ends up masking the data that would show the curve exists.

The two men also disagreed over the natural rate of employment in the U.S. Mishkin said that it may be lower than the Federal Open Market Committee’s view of 4.5%, while Bullard argued that making that concept adjustable is unhelpful. “That’s just a free parameter that’s being moved around to explain current events,” he said.