Monetary Policy and the Wage Inflation-Unemployment Tradeoff


The recent weakening of the inflation-unemployment tradeoff has instigated a debate on whether the New Keynesian framework has outlived its usefulness. Understanding the source of that structural change is crucial for proper monetary policy conduction. I estimate the inflation-unemployment tradeoff using newly assembled data on wages and unemployment rates for 17 advanced economies since 1870. I show that the wage Phillips curve has always been “alive and well” despite displaying a time-varying slope. Using the Phillips multiplier framework, I show that the tradeoff becomes weaker in low price inflation environments due to a muted wage inflation response to monetary policy.

Supersedes Historical Wage Phillips Curves