January FOMC Meeting – Extended discussion of inflation forecasting

Following the staff presentations, participants discussed how the inflation frameworks reviewed in the briefings informed their views on inflation and monetary policy. Almost all participants who commented agreed that a Phillips curve-type of inflation framework remained useful as one of their tools for understanding inflation dynamics and informing their decisions on monetary policy. Unfortunately, they overlook the fact that Phillips Curves do not depict a structural relation. The Phillips Curve is not invariant to monetary policy behavior. In short, it is the Fed that creates the correlations between inflation & unemployment. The Lesson: Phillips Curve analysis is not a reliable…

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