DP13480 The Phillips Multiplier

Author(s):	Régis Barnichon, Geert Mesters
Publication Date:	January 2019
Keyword(s):	Dynamic Multiplier, Inflation-Unemployment trade-off, instrumental variables, Marginal Rate of Transformation, Phillips curve
JEL(s):	C14, C32, E32, E52
Programme Areas:	Monetary Economics and Fluctuations
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=13480

We propose a model-free approach for determining the inflation-unemployment trade-off faced by a central bank, i.e., the ability of a central bank to transform unemployment into inflation (and vice versa) via its interest rate policy. We introduce the Phillips multiplier as a statistic to non-parametrically characterize the trade-off and its dynamic nature. We compute the Phillips multiplier for the US, UK and Canada and document that the trade-off went from being very large in the pre-1990 sample period to being small (but significant) post-1990 with the onset of inflation targeting and the anchoring of inflation expectations.