The Phillips Curve, the Persistence of Inflation and the Lucas Critique: Evidence from Exchange Rate Regimes

We present evidence from the United States and the United Kingdom that the persistence of price inflation is significantly higher under managed-exchange-rate regimes than under gold-based, fixed-exchange-rate regimes. These differences are also reflected in expectations-augmented Phillips curves. We use a two-country macro model, with forward-looking price setters, to demonstrate that higher monetary accommodation of inflation and exchange-rate accommodation of inflation differentials increase inflation persistence. The evidence does not contradict this hypothesis. It supports the hypothesis of forward-looking price setters and highlights the empirical signijicance of the Lucas critique. (JEL E31, E42, F33)

American Economic Review (with Ron Smith)

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On Budgetary Policies, Growth, and External Deficits in an Interdependent World

We investigate the effects of budgetary policies in a two-country model of overlapping generations and endogenous growth. In the presence of capital mobility, endogenous growth rates are equalized, but output levels do not converge. A worldwide rise in the public debt to GDP ratio or the share of government consumption reduces savings and growth. A relative rise in one country’s debt to GDP ratio or its GDP share of government consumption results in a fall in external assets and its relative savings rate. In the short run, the fall in the savings rate is higher, and the country experiences higher current account deficits as a percentage of GDP.

Journal of the Japanese and International Economies (with Rick van der Ploeg)

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