Still in thrall to the Phillips Curve?

In response to the recent nomination of Janet Yellen to become the next Vice Chair of the Federal Reserve (replacing retiring Vice Chair Donald Kohn), economist Larry Kudlow has written an article entitled "Yellen is spellin' future inflation."

Kudlow states that "Ms Yellen is a distinguished economist who unfortunately subscribes to the Phillips-curve model that trades off unemployment and inflation."

Although he does not cite hard evidence that Dr. Yellen subscribes to the Phillips curve model, she has in the past cited texts that support the Phillips curve view, including the 1996 paper authored by her husband, Nobel laureate and UC Berkeley Professor George Akerlof (along with co-authors William Dickens and George Perry). She has also stated that some inflation is good in order "to grease the wheels of the labor market" -- in other words, to increase employment, a clear tenet of the Phillips curve view (and the conclusion of the 1996 essay authored by Akerlof et al).

We have previously discussed the problems with the Phillips-curve view of the world, as well as evidence that Fed chairman Ben Bernanke is "still in thrall to the Phillips curve," as Steve Forbes wrote back in June 2008. For those previous discussions, and what this means for investors, see "The Fed drops the mask," "Who are you going to believe . . . ?" and "The Fed's oversteering and the wreckage of the past decade."

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