DP3612 Exploitability as a Specification Test of the Phillips Curve

Author(s): Patrick Minford, David Peel
Publication Date: October 2002
Keyword(s): Calvo contract, overlapping wages, Phillips curve
JEL(s): E24, E32, J41
Programme Areas: International Macroeconomics, Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=3612

Nominal price and wage rigidity renders monetary policy effective over output. However, this effectiveness extends, under widely used overlapping-wage and Calvo-contract Phillips Curves, to planned monetary policy (‘exploitability’) and not merely to policy surprises. We argue that within both frameworks, when agents write optimal nominal contracts, they will not be exploitable by planned monetary policy. We therefore suggest non-exploitability as a specification test for Phillips Curves.