This paper describes the development of the "triangle" model of inflation, which
holds that the rate of inflation depends on inertia, demand. and supply. This model differs
from most other versions of the Phillips curve by relating inflation directly to the level and
rate of change of detrended real output, and by excluding wages, the unemployment rate,
and any mention of "expectations." The model identifies the ultimate source of inflation
as nominal GNP growth in excess of potential real output growth and implies that a policy
rule that targets excess nominal GNP growth is an essential precondition to avoiding an
acceleration of inflation, Any residual instability of inflation then depends on the severity
of supply shocks.
The textbook and econometric versions of the triangle model were developed
simultaneously in the mid-1970s. Since then there have been two empirical validations for
the U. S. of the model as estimated a decade ago. First, the "sacrifice" ratio of cumulative
output loss relative to the decline in inflation during the business slump of the early 1980s
was predicted accurately in advance. Second, the natural unemployment rate implied by
the model's estimates predicted in advance the slow acceleration of inflation that occurred
in began in 1987, when the unemployment rate fell below 6 percent.
In order to set up a list of libraries that you have access to,
you must first login
or sign up.
Then set up a personal list of libraries from your profile page by
clicking on your user name at the top right of any screen.