RDP 9706: Is the Phillips Curve A Curve? Some Evidence and Implications for Australia 6. Conclusion

This paper has demonstrated that a non-linear specification for the short-run Phillips curve may be a more accurate representation of reality than the traditionally used linear specification. That is, the Phillips curve in Australia may indeed be a curve rather than a line. The estimates of the NAIRU that are implicit in our estimation are highly sensitive to the specifications that we use and have very wide confidence intervals around them. Thus, our estimation should only be regarded as indicative of the presence of non-linearities.

If the Phillips curve is in reality a curve, there are important implications for monetary policy. Firstly, it provides a stronger justification for stabilisation policy than is present in a linear framework. Secondly, it reinforces the need for policy to be forward-looking and to act pre-emptively to offset inflationary pressures. Thirdly, it suggests that deep recessions may have only a marginally greater disinflationary impact than shallower ones, unless they induce large credibility bonuses. Finally, it reinforces the need for policy-makers to proceed cautiously, particularly if the economy is close to its potential.