Economics Stack Exchange Archive

For the Phillips Curve, what is the definition of trend output (ie. $Y_t$)?

• posted by: Juicy on 2012-02-29
• tagged: inflation
• score: 0

I am currently studying the Phillips curve, and the equation for that is: $i - i_e = a(Y - Y_t)$

However, if I am studying the dynamics of inflation over time, is $Y_t$ a constant, or should I model it changing over time? Would appreciate any advice, thanks.

Answer 1039

• posted by: prototoast on 2012-03-01
• score: 0

In Phillips' original paper, The Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom: 1861-1957 (available online here), he uses the %change in wage rates as his y variable, and estimates an equation log(y+a)=log(b)+c*log(x) where x is unemployment.

In more modern implementations, such as the one you cite above, output (GDP) is typically assumed to grow at a constant rate, and so if Y is measured as log GDP, Y_t will be linear.

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