Comment and Discussion

Abstract

James H. Stock: From 1993 through mid-1998, the U.S. economy experienced several years of low unemployment and low and falling inflation that is nothing short of extraordinary. What should one make of this experience? Is it transitory, simply good luck, or has the economy changed in a fundamental way? Is the death of the Phillips curve, so long proclaimed, finally a reality? Although it is widely known that the NAIRU is measured with considerable imprecision, the recent experience is surprising. For example, Staiger, Watson, and I have estimated that in 1989 the NAIRU, based on the GDP deflator, was 6.3 percent, with a 95 percent confidence interval of 5.0 to 7.4 percent.' The United States has now been at or below the lower end of this confidence interval for some time, yet inflation remains quiescent. In his previous work, Robert Gordon has argued that the unemployment-based Phillips curve has been a trusty and stable relation, at least through the early 1990s. In the current paper, he turns his attention to the events of the past five years. His approach to this puzzle is, sensibly, to ask what went wrong with the constant NAIRU, circa-1992 Phillips curve. He considers four sets of factors that could have contributed to the good inflation performance, given recent unemployment: first, traditional supply shocks, in particular food and energy prices and import prices, which have been included in Gordon's empirical work at least since 1982; second, some new supply shocks, in particular medical prices and computer prices; third, recent measurement improvements