The Inflation and Output-Gap Tradeoff Debate Revisited

In this study, using the Phillips curve type models, we use four different measures of U.S. output to test the hypothesis that there is a positive correlation between the output-gap and wage inflation. We measure the output-gap using a constant natural level of output as well as a Kalman filter where the natural level of output changes over time. Neither the use of real GDP nor services sector data generated any support for the hypothesis. However, we found overwhelming evidence of positive correlation between the output-gap and wage inflation in the durable goods industries. Our results suggest that a requiem for the Phillips curve may be premature.