Christopher J Waller: The unstable Phillips curve

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Macroeconomics and Monetary Policy conference, sponsored by the Federal Reserve Bank of San Francisco, San Francisco, California, 31 March 2023.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Accompanying charts of the speech 

Thank you, Sylvain, and thank you to the Federal Reserve Bank of San Francisco for inviting me to speak tonight. After listening to many dinner speakers through the years, I am well aware that after the entrees are served, no one wants to hear someone blabber for 45 minutes. So, I will try to keep this short to leave enough time for a robust discussion afterward, which I hope my remarks will generate.

My topic tonight is "The Unstable Phillips Curve." This is not intended to be a deep academic analysis but rather to present some thoughts for discussion. I know that I am walking into the Phillips curve lion's den, given the number of researchers in the Bay Area who work on Phillips curve estimation. But in my current job, I am used to people disagreeing with me.

The Phillips curve, a relationship between price or wage inflation and some measure of economic slack, has been the foundation of monetary policy for decades. A common way to estimate it is to look at output price inflation and the unemployment rate. One theory, or story, is that as aggregate demand increases, labor demand will increase as well. As a result, prices of goods and services will rise and firms will hire more workers, as long as there is some stickiness in nominal wages. Consequently, this story implies that the unemployment rate will fall. So, there is a negative relationship between price inflation and unemployment.