RICHMOND, Va., June 22 /PRNewswire/ -- Today the Federal Reserve Bank
of Richmond released its 2006 Annual Report, which features an examination
of the relationship between economic growth and inflation, as illustrated
by the history of the Phillips curve.
In "Inflation and Unemployment: A Layperson's Guide to the Phillips
Curve," Richmond Fed President Jeffrey M. Lacker and Senior Vice President
and Director of Research John A. Weinberg explain the evolution of
economists' understanding of this relationship. They also apply the modern
approach to the Phillips curve to recent conditions in the U.S. economy,
which in 2006 experienced slowing growth at the same time as rising
inflation. This scenario created a potential dilemma for policymakers, as
those phenomena are typically understood to require opposite policy
responses -- lowering the short-term interest rate to counter slower real
growth while raising the rate to tame inflation.
But Lacker and Weinberg argue that this understanding of the Phillips
curve can be misleading. The statistical relationship does not represent a
stable menu of options that policymakers can employ to ambitiously manage
the economy, as many economists once thought. Citing the inflation of the
1970s and efforts to bring it under control over the past 25 years, Lacker
and Weinberg argue that people's expectations of the future conduct of
policy play a dominant role in how inflation and unemployment interact.
This means that unless policymakers can influence expectations, they will
have only limited ability to fine-tune the economy, even temporarily, and
that maintaining economic stability hinges largely on people's confidence
in future policy actions. Thus, monetary policy works best when it allows
the real economy to respond appropriately to economic fundamentals, rather
than attempting to insulate it from shocks by tolerating substantial swings
in inflation.
In addition to the essay, the 2006 Annual Report also features a
summary of the Fifth Federal Reserve District's economy -- which includes
annual employment, income, and housing statistics -- and information on the
Bank's operational and financial activities. The annual report is available
on the Federal Reserve Bank of Richmond's Web site at
http://www.richmondfed.org or by contacting the Public Affairs Department
at 804.697.7982.
The Federal Reserve Bank of Richmond is one of 12 District Reserve
Banks that together with the Board of Governors in Washington, D.C., make
up the Federal Reserve System. The Richmond Fed serves the Fifth Federal
Reserve District, which encompasses the District of Columbia, Maryland,
North Carolina, South Carolina, Virginia, and most of West Virginia.
SOURCE Federal Reserve Bank of Richmond
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Related links:
http://www.richmondfed.org
CONTACT:
Lisa Oliva of the Federal Reserve Bank of
Richmond, +1-804-697-8192, Lisa.Oliva@rich.frb.org
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