economic.day

The Long Afternoon of Capital

From the trading pits of LaSalle to the marble halls of Threadneedle Street, a quiet recalibration is underway — one that the mimeograph machines have not yet caught up with.

The equity markets, having spent the better part of the autumn in a state of uneasy levitation, returned this morning to the kind of measured deliberation that the older traders remember from the spring of 1973. There is, among the senior governors of the central banks, a discernible reluctance to say anything definitive — a reluctance which the ticker tape, in its slow mechanical patience, betrays with every passing minute.

A working paper distributed at the Brookings symposium last Tuesday suggested that the long-run Phillips relationship, presumed dead by the rational-expectations school of the late 1970s, may yet have one more chapter to dictate. The paper, hand-typed on a Selectric and circulated in carbon-copy among forty-two department chairs, has been the topic of every faculty lounge conversation from Cambridge to Chicago.

The bond market, for its part, continues to behave as it has always behaved when confronted with ambiguity: with a slight, cautious tightening of the spread, a subtle steepening of the curve, and an unhurried glance toward the door, in case anyone of consequence should walk in.

Across the Atlantic, the Bank for International Settlements has issued its quarterly review — printed, as is its custom, on heavy cream stock with a pale ochre cover — in which the term "secular stagnation" appears nineteen times and the phrase "animal spirits" appears, for the first time since 1981, exactly twice.

On the Persistence of Phillips

An essay, by way of digression, concerning a curve that refuses to be either dead or alive.

One of the consolations of having spent forty years in this profession is that one is occasionally permitted, in the late afternoon of one's career, to revisit a controversy that one had assumed long settled. The Phillips curve — named for the New Zealand engineer who, in 1958, plotted nominal wages against unemployment in the United Kingdom from 1861 to 1957 — is one such controversy.

Friedman, in 1968, declared the long-run version of the curve vertical; expectations would adjust, and any apparent tradeoff would be a temporary illusion. Lucas, with his characteristic mathematical severity, formalised the argument in 1972. By 1980, the curve was, in the official histories, extinct — a fossil from an earlier, more naive era.

And yet. Each successive cycle since 1995 has produced, in some quiet quarter of the literature, a paper rehabilitating the relationship in modified form: a "nonlinear Phillips curve," an "anchored-expectations Phillips curve," a "regional Phillips curve," a "wage Phillips curve," even a "low-inflation Phillips curve." The body of the corpus refuses to remain interred. It is, perhaps, the academic equivalent of the trading floor's old superstitions — the idea that the market remembers what the textbooks have forgotten.

Three Theses on the Curve's Afterlife

1. Thesis the First. The curve was never the relationship; it was a sketch of a relationship that holds only in particular monetary regimes.
2. Thesis the Second. The flatness of the curve in recent decades is itself a regime — one that anchored expectations have produced and that may, with sufficient provocation, unanchor.
3. Thesis the Third. No statistical relationship in macroeconomics has ever been entirely killed. They merely retire to the marginalia, awaiting recall.

What ought we to conclude? Perhaps only this: that the curve, like the broadsheet itself, persists not because it is fashionable but because it remains, in its way, useful. A pedagogical instrument, a piece of professional shorthand, a way of organising thought. To declare it dead is to declare too much; to declare it alive is to declare too little.