Introduction to the Policy Forum on the Phillips Curve

Abstract

In the context of the current economic climate in Australia, uncertainty about future economic growth and labour market conditions feeds into uncertainty about inflation, hence the path of future interest rates. There is tension, for example, between reducing interest rates early or maintaining interest rates at a ‘higher for longer’ level. The Phillips Curve is relevant to this tension since it provides information about the sensitivity of inflation to wider economic conditions. The three articles in this forum explore the dynamics of the Phillips Curve, with a particular focus on Australia.

In the first article, Mallick uses state-level data to estimate the price Phillips Curve for Australia. A novel aspect of the research is that it examines the inflation–unemployment trade-off in Australia during the post-COVID period. Overall, the slope of the Phillips Curve with respect to unemployment is negative, albeit moderately. The article finds little evidence that the slope has steepened in the post-COVID period.

In the second article, Lie ties the Phillips Curve to monetary policy, examining the importance of the inflation targeting window when the Phillips Curve is relatively flat. Given the Reserve Bank's (RBA) inflation targeting window of 2–3 per cent, Lie argues that the RBA effectively engages in ‘average-inflation-targeting’ (AIT). Given a flat Phillips Curve, Lie presents evidence that there are welfare gains stemming from the adoption of longer targeting windows for AIT. Given current economic conditions, this suggests that it may be appropriate to adopt a slower (monetary policy) responsiveness to news about lower inflation.

In the third article, Abbas studies the role of the natural rate of interest $r_t^{*}$ on the NKPC. Evidence is provided of significant time variation in $r_t^{*}$, and this is used to understand time variation in expected inflation. The latter rises over most of the 2000s, before falling materially. Abbas argues that the natural rate of interest has implications for the measurement of variables such as the output gap and inflation expectations, and therefore for the dynamics of inflation.

Overall, the articles highlight key considerations on an important topic for Australia that should be highly valued by the journal's readership.