Inflation Uncertainty and the Phillips Curve: Some Empirical Evidence
The coincidence of high rates of unemployment and high rates of inflation, seemingly apparent in several countries for sustained periods of time, has led to a rethinking of the Phillips curve. One explanation for the appearance of a positive association between unemployment and inflation, advanced by Milton Friedman in his Nobel lecture, involves an observed linkage between the level and the variability in inflation. This note is an attempt to test whether inflation uncertainty, which should be related to variability, could explain the observed patterns of inflation and employment. It is shown that inflation uncertainty is negatively related to employment, and that failure to consider uncertainty of inflation can obscure the effect of inflation forecast errors on employment.
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