THE PHILLIPS-CURVE AND DIFFERING INFLATION-EXPECTATIONS

This article explores the effects of allowing for differing inflation expectations concerning consumer prices and producer prices in a simple Phillips Curve model of wage inflation. Expectations are assumed to be formed adaptively. It is found that after lagged consumer price inflation is accounted for, lagged producer price inflation contributes significantly in explaining wage inflation. Simulation shows that the model allowing for differing inflation expectations also reduces, but does not eliminate, the overprediction of wage inflation in the 1980s that is often found in simple Phillips Curve models estimated with data ending prior to the 1980s.