capital taxation and accumulation in a life cycle growth model almost all of the serious economic work on savings decisions within the past decade has relied on some variant of the life cycle hypothesis in which savings arise out of individual choices of an optimum lifetime consumption path this paper reexamines the incidence and welfare consequences of capital income taxes within a realistic life cycle model the results suggest that the elimination of capital income taxation would have very substantial economic effects for example a complete shift to consumption taxation might raise steady state output by as much as 18 percent and consumption by 16 percent the long run welfare gain from such a shift would for plausible parameter values exceed 150 billion annually stated somewhat differently shifting to consumption taxation would raise the lifetime utility of the representative consumer by the equivalent of about six years income in the new steady state these estimates dwarf estimates of the static welfare cost of taxation and significantly exceed even extreme previous estimates of the dynamic loss this study departs from earlier analyses of the effects of taxes on capital income in several respects probably the most important difference between this treatment and most preceding ones lies in the assumptions about the interest elasticity of saving it is shown below that the common two period formulation of saving decisions yields quite misleading results a more realistic model of life cycle savings demonstrates that for a wide variety of plausible parameter values savings are very interest elastic this implies that shifting away from capital income taxation would significantly increase capital formation making possible long run increases in consumption many studies of the welfare effects of capital income taxation have ignored the general equilibrium effects of increased capital formation in an economy with life cycle savings there is no presumption that the undistorted growth path corresponds to any sort of social optimum as peter diamond has shown life cycle savings can lead to a steady state capital intensity either greater or less than the golden rule level more generally it is clear that there is no reason to believe that a life cycle economy will maximize any particular intertemporal social welfare function a fundamental tenet of welfare evaluation is that preexisting distortions must be considered in evaluating the consequences of tax changes the results presented in this paper take explicit account of the nonoptimal character of the no tax steady state this explains in large part why such a sizeable welfare effect of capital taxes is found in an economy far from the golden rule level of capital intensity there are substantial gains in steady state consumption achievable through increased capital formation section i of the paper examines the aggregate savings function in a continuous time life cycle framework the second section clarifies the differences between wage and consumption taxes an aggregate production function is added to complete the model in the third section the effects of changes in capital taxes on both steady state incidence and welfare are considered within a general equilibrium framework the final section of the paper discusses some implications of the results and suggests areas which appear to warrant further study assistant professor of economics massachusetts institute of technology and research analyst national bureau of economic research i am grateful to alan auerbach martin feldstein laurence kotlikoff to the participants in the nber workshop on business taxation and to the harvard public finance seminar for useful discussions james poterba and james buchal performed the numerical calculations

output input and productivity measurement in u s agriculture 1948 79 tornqvist theil indexes of outputs and inputs are constructed these data are used to construct indexes of productivity growth over the postwar period the productivity indexes can be derived from a flexible multioutput multifactor representation of the structure of production constrained to constant returns to scale total factor productivity grew at an average annual rate of 1 75 compared with 1 70 per year estimated by the u s department of agriculture the similar estimates of productivity growth overshadow some important differences in measurement of individual inputs the major effort in measuring agricultural productivity is undertaken by the u s department of agriculture usda an american agricultural economics association task force on measuring productivity has examined the sources and procedures used in constructing the official statistics see loomis and barton lambert barton and durost the task force recommended that the usda adopt a series of specific improvements for constructing certain inputs and use an indexing procedure that does not impose a priori restrictions on the structure of production 1 this paper presents revised indexes of outputs and inputs the data are used to construct indexes of productivity growth over the postwar period the productivity indexes can be derived from a flexible multioutput multifactor representation of the structure of production the translog transformation function constrained to constant returns to scale 2 the indexes of outputs and inputs have the same form and their ratio coincides with the estimate of productivity growth

the effects of tax policy on aggregate agricultural investment the effects of tax policies on aggregate agricultural investment are examined results from this analysis suggest that tax policies are effective in promoting agricultural investment nearly 20 percent of net investment in agricultural equipment during the period 1956 through 1978 is attributed to tax policy from 1956 to 1978 tax policy has stimulated in real dollars over 5 billion in net investment in equipment and in excess of 1 billion in structures

empirical evidence on inflation expectations in the new keynesian phillips curve abstract we review the main identification strategies and empirical evidence on the role of expectations in the new keynesian phillips curve paying particular attention to the issue of weak identi

evaluating unemployment policies what do the underlying theories tell us the paper surveys unemployment policies for advanced market economies and evaluates them by examining the predictions of the underlying macroeconomic theories the basic idea is that for the most part different unemployment policy prescriptions rest on different macroeconomic theories and our confidence in the prescriptions should depend at least in part on theories ability to predict some salient stylized facts about unemployment behavior the paper considers four types of policies laissez faire demand management policies supply side policies and structural policies copyright 1995 by oxford university press

optimal anti inflation programs in semi industrialized economies orthodox versus heterodox policies abstract the paper characterizes the optimal time consistent anti inflation program in a small open semi industrialized economy when policy makers choose the rate of exchange rate crawl the rate of change of fiscal spending and a wage and price control parameter to minimize deviations of output and inflation the optimal program involves a rapidly decelerating rate of crawl a sharp reduction in spending and a short initial period of wage and price controls the paper also assesses the importance of controls in helping to reduce the output loss associated with fighting inflation

reconciling the wage curve and the phillips curve the wage curve is the negative relationship that links wage levels to the unemployment rate it fits accurately with modern non competitive labour market models but goes against a phillips curve modelling because the latter ties wage growth to the unemployment rate in this article we present a comprehensive review of these non competitive models highlighting recent contributions that try to eliminate the possible gap that exists between the concepts of the wage curve on the one hand and the phillips curve on the other copyright blackwell publishers ltd 2005

predetermined prices and the persistent effects of money on output this note illustrates a model of predetermined pricing where firms set a fixed schedule of nominal prices at the time of price readjustment based on the work of fischer 1977 this contrasts with the model of fixed pricing the specification underlying most recent dynamic sticky price models it is well known that predetermined pricing cannot generate substantial persistence in the real effects of monetary shocks when prices are set via fixed duration contracts unless the contracts are of long duration however we show that with a probabilistic model of price adjustment a predetermined pricing specification can produce almost as much persistence as the more conventional model of fixed prices without the assumption of long average contract duration

monetary policy trend inflation and the great moderation an alternative interpretation with positive trend inflation the taylor principle does not guarantee a determinate equilibrium we provide new theoretical results on determinacy in new keynesian models with positive trend inflation and new empirical findings on the federal reserve s reaction function before and after the volcker disinflation to find that i while the fed likely satisfied the taylor principle before volcker the us economy was still subject to self fulfilling fluctuations in the 1970s ii the us economy switched to determinacy during the volcker disinflation and iii the switch reflected changes in the fed s response to macroeconomic variables and the decline in trend inflation jel e12 e23 e31 e32 e52

the new keynesian phillips curve revisited abstract several authors have questioned the evidence claimed by gali and gertler 1999 and gali et al 2001 that a hybrid version of the new keynesian phillips curve approximates european and us inflation dynamics quite well we re examine the evidence using the vector autoregressive framework and likelihood based methods paying particular attention to the stationary and nonstationary and possibly cointegrated nature of variables involved our results show that the exact as well as the inexact form of the hybrid nkpc are clearly at odds with the european data on the other hand gali and gertler 1999 finding that the inexact hybrid nkpc is a good first approximation to the us inflation dynamics seems less at odds with the data however the assumption of the model that the stochastic term forms a sequence of innovations may be problematic as we find indication of autocorrelation in the estimated residuals the exact form of the hybrid nkpc is firmly rejected by the us data

hyperbolic discounting and the phillips curve using a standard dynamic general equilibrium model we show that the interaction of staggered nominal contracts with hyperbolic discounting leads to inflation having significant long run effects on real variables

the impacts of tax reform on agricultural households estimates of tax reform s impacts usually concentrate on macroeconomic impacts but attention at the industry or sectoral level is often limited our study uses a computable general equilibrium cge model to estimate the disaggregated impacts of the tax cuts and jobs act tcja of 2018 which lowered personal and corporate tax rates focusing on agriculture we use survey data to calculate how the tcja would change the tax rates faced by farmers at the sector level we use internal revenue service data to calculate tax rates for all other producers we then simulate the economy wide and sectoral effects of tcja we find that the tcja would cause a reduction in agricultural output as resources would be reallocated to other sectors using our survey data we extend the cge results to measure the impacts to farm households from changes in on and off farm income we find that most farm households would have income gains from tax reform our tax reform scenario highlights the fact that investment weighs heavily on model results that is firms that are attractive to domestic and foreign investment have gains in demand for their products while other sectors such as primary agriculture experience decreases in production a sensitivity analysis that reduces the attractiveness of the united states in foreign investment shows smaller impacts of tcja especially for macroeconomic variables

selection and monetary non neutrality in time dependent pricing models for a given frequency of price adjustment monetary non neutrality is smaller if older prices are disproportionately more likely to change selection for the age of prices provides a complete characterization of price setting frictions in time dependent models selection for older prices is weaker and non neutralities are larger if the hazard function of price adjustment is less strongly increasing selection is weaker if there is heterogeneity in price stickiness finally selection is weaker if durations of price spells are more variable in particular the taylor 1979 model exhibits maximal selection for older prices whereas the calvo 1983 model exhibits no selection

okun s micro macro system a review article prices and quantities is the brilliant and disturbing last work of arthur m okun 1928 1980 for more than a decade okun was the foremost practitioner of macroeconomics in the united states his critical intelligence at both the theoretical and empirical ends of economics was unsurpassed these facts were virtually a manufacturer s warranty that the book whatever its argumentation and evidence would be significant we want to know what okun thought but this background was no guarantee of an important treatise and it must have taken some courage to venture a big theoretical work in an accessible style on urgent questions in fact okun has delivered a creative and virtuosic study in economic theory the book s contribution is to provide a complete description of an economy in which rational economic agents consider the distributional consequences of wage and price decisions the perspective adopted one which is winning growing favor of late is contract theoretic because they wish to economize on their costly transactions with one another people trade repeatedly with the same agent so trust and fidelity to understandings are important the ensuing analysis lodges some basic dissents from the informational expectational paradigm developed over the last score of years it is particularly stimulating and troubling on the main policy controversy of the decade the question of disinflation

on the real effects of short and long run inflation and relative sector price variability some empirical evidence using the kalman filter this paper evaluates empirically the effects of sector relative price variability and short run and long run inflation on the growth rate of real output in the united states since 1947 also permanent and transitory estimates are constructed to evaluate the effects of unanticipated movements in sector relative price on the growth rate of real output the results show a statistically significant inverse relationship beween the growth rate of real output and transitory sector relative price variability and anticipated long run inflation and a direct relationship between the growth rate of real output and unanticipated short run inflation

tax reform and land using sectors in the u s economy a general equilibrium analysis a computable general equilibrium model of the u s economy is used to assess the effects of the tax reform act of 1986 on land using sectors forestry and three classes of agriculture the model s components include twelve production sectors six consumer groups a balanced budget government sector and a zero surplus foreign sector in relative terms tax reform reduces total value added output in land using sectors to a greater extent than other sectors in the economy experiments are also performed comparing partial and general equilibrium specifications of the economy and the impact of choice of input substitution elasticities

real effects of anticipated and unanticipated money some problems of estimation and hypothesis testing abstract the paper addresses two issues that arise in estimation and testing of the real effects of anticipated and unanticipated money first it is shown that identification of the effects of unanticipated or unperceived monetary growth on real output is possible only if the a priori restriction is imposed that monetary growth does not depend on unanticipated or unperceived output second the existing empirical work of barro and others does not allow for three known channels through which money can affect real variables these are 1 past and present anticipations of future monetary growth the inflation tax channel 2 expectations of monetary growth in a given period conditioned at various preceding dates the fischer phelps taylor effect and 3 past and present revisions in forecasts of future monetary growth the presence of the first of these would mean that alternative open loop monetary growth rules have real effects the presence of the other two implies that monetary feedback rules can have real effects omission of the first channel can lead to biased estimates of the effects of past anticipated monetary growth potentially serious observational equivalence problems are associated with the other two

tax policy and u s agriculture a general equilibrium analysis this article emloys a computable general equilibrium model to analyze the effects of eliminating farm and food tax preferences in 1977 tax differentials on capital income labor payments and production and sales taxes are each examined results indicate that these combined preferences lowered food costs by about 4 5 billion while enhancing after tax returns to farm land labor and capital the associated general equilibrium tax expenditure is estimated to have been between 5 5 and 6 6 billion

output effects of a tariff under flexible exchange rates abstract a tariff s impact on output is shown to depend on the asset market structure if foreigners do not hold the domestic asset as is generally assumed in the previous literature the tariff induced current account surplus creates a large enough currency appreciation that demand for domestic output falls when foreigners hold the domestic asset the current account surplus results in an international transfer of assets which allows a smaller currency appreciation the more similar are asset preferences across countries the smaller is the appreciation and therefore the greater is the likelihood that domestic output will increase

counterinflationary policy in a unionised economy with nonsynchronised wage setting a model of the determination of wages and employment in a unionised economy with nonsynchronised wage setting is presented in this paper it is shown that a monetary deflation can lead to prolonged unemployment even though the unions act rationally and with full information about the change in policy the model generates a statistical phillips curve in which the rate of change of money wages depends on the anticipated growth rate of the money supply and on disequilibrium unemployment conventional incomes policies are shown to have desirable social effects but run counter to the perceived self interest of the trade unions and are therefore likely to be resisted taxes on wage increases have desirable long run effects but do not appear able to reduce the transitional unemployment costs of monetary deflation

inflationary rigidities and orthodox stabilization policies lessons from latin america orthodox stabilization programs in latin american countries have been notoriously unsuccessful in combating inflation despite the imposition of stringent cuts in government deficits in most cases inflation came down only slowly and temporarily with concomitant declines in growth and employment the bolivian program one of the only latin american successes is contrasted with those of argentina brazil chile and mexico the problems of dealing with chronic inflation are compared with those of hyperinflationary countries and the influence of price and wage rigidities expectations and credibility is explored the study shows that fiscal restraint is a necessary but not sufficient condition for success and that sound management of nominal variables the exchange rate and money supply are also necessary the critical role of credibility is linked with price and wage rigidities in the chronic inflation countries whereas the unsuitability of hyperinflation is seen to increase the credibility of and thus the potential for successful stabilization programs

does the law of one price hold in a high inflation environment a tale of two cities in turkey this study addresses the price convergence in two cities in turkey istanbul and ankara using annual data over the three quarters of the twentieth century 1922 1998 characterized by prevailing high inflation rates for most of the period in contrast to the rest of the literature addressing convergence in price levels with a typical result of extremely slow convergence rates at best we argue that convergence is much easier detected in growth rates rather than levels of prices we suggest using the bounds testing procedure of pesaran et al 2001 for this purpose we find a clear cut evidence on the existence of a common driving force behind inflation dynamics in istanbul and ankara a finding that is in contrast with the results typically reported in related literature

changing fiscal federalism in the united states effects on agriculture and food consumption this study examines the effects of the changing fiscal role of the federal government with respect to providing financial support for low income households and the taxation of returns from capital specifically the effects of reducing transfers to low income families by us 10 billion and balancing the ensuing federal budget surplus by increasing the preferential tax treatment of capital gains for individual taxpayers are examined we examine how this combined budget neutral fiscal policy change affects agricultural production economy wide welfare and the consumption of food our results indicate reducing the distortion between the taxation of capital and labour increases economy wide efficiency leading to increased consumption of food by all income classes although economy wide food expenditures increase offsetting the revenue shortfall from a reduced capital tax by decreasing transfers to low income families reduces food expenditures for the two lowest income groups by nearly us 1 billion

staggered vs synchronised wage setting in oligopoly abstract this paper analyses the dynamic equilibrium which emerges when wages are bargained upon at different times in the various firms operating in an oligopolistic industry unions set wages the management of the firms the output level and the outcome of this interaction is captured by the game theoretic concept of markov perfect equilibrium the steady state equilibrium is compared with that which would emerge if all wage negotiations occurred simultaneously it is shown that staggered wage setting leads to higher steady state levels of wage and unemployment than synchronised wage setting it is also shown that a longer duration for wage contracts leads other things equal to lower wages and higher employment the final part of the paper shows that allowing for nash bargaining between union and management and for risk averse unions does not alter the conclusions of the paper

inertial inflation indexation and price stickiness evidence from brazil abstract this paper evaluates the inertial inflation hypothesis for brazil the hypothesis posits that indexation created a feedback mechanism such that one time supply shocks were fully transmitted into permanent changes in inflation a theoretical model is used to show that this outcome is based on the assumption of perfect price flexibility however with price stickiness indexation does not produce inertial inflation the degree of inertia is then compared for two periods one without indexation 1945 1963 and one with indexation 1969 1985 finally vector autoregressive representations are estimated for the latter period allowing for price stickiness the empirical results do not support the hypothesis

price adjustments in a general model of state dependent pricing we study the distribution of retail price adjustments under the assumption that firms are more likely to adjust their prices when doing so is more valuable our setup nests calvo 1983 at one extreme and a fixed menu cost model at the other all parameterizations are ranked by a measure of state dependence high state dependence implies counterfactually that there are no small price changes and that the variance of price changes falls sharply with trend inflation the parameterization that best fits microdata has low state dependence implying a phillips curve coefficient 60 as large as that of the calvo model but is nonetheless well behaved at high inflation rates

monetary policy trend inflation and unemployment volatility the literature has long agreed that the dmp model after diamond 1982 mortensen 1982 pissarides 1985 with search and matching frictions in the labor market can deliver large volatilities in labor market quantities consistent with empirical data only if there is at least some wage stickiness i show however that the model can deliver nontrivial volatilities without wage stickiness as long as it has price dispersion and nonzero long run inflation rates i find that by keeping inflation at a positive rate monetary policy may be accountable for the large standard deviations observed on labor market variables in addition the shimer 2005 puzzle disappears under monetary policy shocks

services inflation dynamics and persistence puzzle in brazil a time varying parameter approach this article analyses services inflation dynamics in brazil focusing on the services inflation persistence puzzle for monthly data from january 2004 to february 2016 we apply a time varying para

monetary targets real exchange rates and macroeconomic stability abstract in this paper i develop a model to determine the optimal degree of flexibility in attaining monetary targets in an economy that is affected by shocks in the labor and financial markets i then simulate the model to assess the optimal degree of monetary policy flexibility in spain a country that has adopted monetary targets rigidly since 1978 i show that the model supports the policy choice of that country i also show that the monetary authorities should attribute more importance to real exchange rate movements in choosing their policies if the spanish economy becomes more open to international trade or if the labor market becomes more flexible

the structure of u s agricultural technology 1910 78 this paper utilizes 1910 78 time series data and a single product aggregate translog profit function to measure the structure of u s agricultural technology duality relations are used to devise a multifactor measure of biased technical change a measure of nonhomotheticity is introduced which indicates the effects scale change has had on aggregate cost shares the empirical analysis finds that different nonhomothetic technologies characterized the prewar and postwar periods differing technical change biases are consistent with relative price trends during the two periods showing that the long run structure of u s agricultural technology has been consistent with the hayami ruttan induced innovation theory

the return of the liquidity effect a study of the short run relation between money growth and interest rates in this article i use band pass filters to investigate the short run relationship between money growth and interest rates i find a negative correlation between short run movements in money growth and interest rates which i interpret as evidence that the liquidity effect dominates the anticipated inflation effect

price wage dynamics and inflation in socialist economies empirical models for hungary and poland this article analyzes the determinants of open inflation in transitional socialist economies with reference to recent experience in hungary and poland a simple inflation model is centered on the transmission process and on the short run dynamics of inflation further incorporating a number of features specific to socialist economies and working with quarterly data dynamic price and wage equations are estimated the estimated equations allow satisfactory exploration of the role and weight of foreign prices and domestic factors in propagating inflation foreign prices matter but developments on the cost side are critical in relating exogenous policy driven adjustments to the price level to increases in the rate of inflation the absence of conventional market based equilibrating mechanisms requires that nominal anchors particularly wage restraints feature prominently in any stabilization program adopted by reforming socialist economies copyright 1992 by oxford university press

trend inflation wage and price rigidities and productivity growth abstract what are the steady state implications of inflation in a general equilibrium model with real per capita output growth and staggered nominal price and wage contracts surprisingly a benchmark calibration implies an optimal inflation rate of 1 9 percent the analysis also shows that trend inflation has important effects on the economy when combined with nominal contracts and real output growth steady state output and welfare losses are quantitatively important even for low values of trend inflation further nominal wage contracting is found to be quantitatively more important than nominal price contracting in generating the results this conclusion does not arise from price dispersion per se but from an effect of nominal output growth on the optimal markup of monopolistically competitive labour suppliers finally accounting for productivity growth is found to be important for calculating the welfare costs of inflation indeed the presence of 2 percent productivity growth increases the welfare costs of inflation in the benchmark specification by a factor of four relative to the no growth case

output persistence from monetary shocks with staggered prices or wages under a taylor rule we analytically examine output persistence from monetary shocks in a dsge model with staggered prices or wages under a taylor rule surprisingly while taylor style staggering never yields persistence calvo style staggering of wages does generate persistence under decreasing returns to labour c 2009 elsevier b v all rights reserved

unemployment as excess supply of labor implications for wage and price inflation abstract the introduction of both market clearing wages and nominal rigidities on wage setting can be used to rationalize unemployment as excess supply of labor in the new keynesian model as a result wage inflation dynamics are forward looking and depend negatively on the rate of unemployment moreover both price inflation and wage inflation evolve as indicated by equations equivalent to those obtained in erceg et al 2000 though with different slope coefficients in an equal volatility comparison the model with unemployment conveys less price stickiness and more wage stickiness

cooperative and noncooperative protection against transferable and filterable externalities given self protection from an undesirable environmental externality we examine under several conditions the efficiency properties of cooperative and noncooperative behavior we demonstrate that if self protection can transfer the externality to another agent then noncooperative behavior will lead to overprotection if self protection filters or dilutes the externality then noncooperation leads to underprotection in addition overprotection will worsen if an agent with more relative power is allowed a first mover advantage or if the damage function is elastic and transferability is uncertain finally a reduction in uncertainty about transferability will accentuate overprotection if the damage function is inelastic our results suggest that coordination of protection activities among agents will enhance the overall gains from environmental policy in the european single internal market of 1992 coordination minimizes the costs of environmental protection thereby reducing the public credibility of its foes

staggering the optimal monetary rule and persistence abstract the purpose of this paper is to show that persistence is not an attribute that derives from the characteristics of wage and price setting alone the structure of demand the monetary rule and the welfare loss function are also crucial determinants of the time series characteristics of the model

wage interdependence through decentralized bargaining abstract the idea that sector specific unions are influenced by the wages obtained by other unions has mainly been used to support the empirical observation that wages are highly correlated among industries the sources of wage interdependence can mainly be found in unions preferences in the nature of technology and in price and demand determination the presence of externalities and of strategic complementarity among unions leads to suboptimal equilibria which generates non desired inflation unemployment and possibly also trade balance deficit this enforces the idea that part of current unemployment can be eliminated by improving the cooperation between social actors

is there a unit root in the inflation rate evidence from sequential break and panel data models summary using sequential trend break and panel data models we investigate the unit root hypothesis for the inflation rates of thirteen oecd countries with individual country tests we find evidence of stationarity in only four of the thirteen countries the results are more striking with the panel data model we can strongly reject the unit root hypothesis both for a panel of all thirteen countries and for a number of smaller panels consisting of as few as three countries the non rejection of the unit root hypothesis for inflation is very fragile to even a small amount of cross section variation 1997 john wiley sons ltd

an international tax on pollution and natural resource depletion abstract during 1989 we witnessed a surge in top level political concern for environmental problems expressed in major green speeches from politicians such as thatcher gorbachev and bush advocating the strengthening of international environmental cooperation when it comes to actual implementation however policies adopted are comparatively weak as illustrated by insufficient support for the united nations environment programme unep which still carries a vast responsibility and work load with a completely undersized budget and staff it is now time to start discussing concrete issues such as increased finance and the use of more efficient policies

surprise party estimating the consequences of unexpected presidential election results alesina s quarterly journal of economics 102 651 678 1987 influential model of presidential elections with ideologically motivated parties attributes higher growth and lower unemployment under democratic presidents to the surprise inflation a democratic victory entails in contrast to the published literature we test this hypothesis using calcula tions of presidential election surprises consistent with the assumption of rational economic actors we confront the econometric complications attending a time series approach tak ing into account economic growth dynamics we ultimately fail to confirm the hypothesis that the level of uncertainty associated with presidential election results has an effect on economic outcomes

the phillips curve the persistence of inflation and the lucas critique evidence from exchange rate regimes comment we present evidence from the united states and the united kingdom that the persistence of price inflation is significantly higher under managed exchange rate regimes than under gold based fixed exchange rate regimes these differences are also reflected in expectations augmented phillips curves we use a two country macro model with forward looking price setters to demonstrate that higher monetary accommodation of inflation and exchange rate accommodation of inflation differentials increase inflation persistence the evidence does not contradict this hypothesis it supports the hypothesis of forward looking price setters and highlights the empirical significance of the lucas critique jel e31 e42 f33