While denying it, the Federal Reserve is still in thrall to the Phillips curve.
And that discretion is still influenced by Keynesian thinking and a Phillips Curve mentality.
The data never supported that theory, and the stagflationary 1970s totally destroyed the validity and credibility of the Phillips curve.
The real Phillips curve, it turned out, should have shown not an indirect relationship between inflation and unemployment, but a direct one.
In particular, in his second speech a week and a half ago, on March 22, Bernanke totally piled on the Phillips curve.
Alas, while Federal Reserve governors are formally four-square against trying to fine-tune the economy, they are still influenced by the Phillips curve.
Experience has demonstrated time and again that the Phillips curve is b.s.
Our central bank is--as are many economists--still slave to the theory, the so-called Phillips Curve, that there is a connection between prosperity and inflation.
This Phillips curve (tradeoff) mentality has been proven wrong by decades of research and experience, yet the Fed continues to be under its spell.
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The Phillips curve, you might remember, is that scourge of monetary policy the world over that holds that there is a trade-off between unemployment and inflation.
Like the leftover static originating from the big bang billions of years ago that we can still hear on the radio, the residue of the Phillips curve lurks.
In the 1950s, when the doctrine was first elucidated, and in the 1960s and 1970s, the Phillips curve gulled central bankers left and right, above all at the U.S. Fed.
The memory of the Great Depression of the 1930s and its hideous unemployment rate was still fresh, and the Phillips curve appeared to offer a magic bullet for precisely that problem.
Monetarists correctly argued that inflation is always a monetary phenomenon, but the newly revived theory that was long ago dismissed even by Friedman is merely a variation of the much discredited Phillips Curve.
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Bernanke then went on to insist that the view (which he did not identify as that of the Phillips curve, after a New Zealand economist of that name, by the way) had no credibility in point of fact and operation at any time throughout its period of doctrinal hegemony.
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