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BPEA Article

Wage-Price Controls and the Shifting Phillips Curve

Abstract

THE CONDITION OF THE U.S. ECONOMY improved in almost every respect
after the initiation of the wage-price control program on August 15, 1971.
Real gross national product grew rapidly, unemployment finally began to
decline, and the rate of inflation moderated. But the coincidence of timing
does not necessarily mean that controls are an essential condition for prosperity,
or that the August 1971 message was the key that unlocked the
floodgates behind which real aggregate demand had been restrained. The
major task of this paper is to assess the effect of the controls by comparing
the actual performance of the economy with its performance without controls
as predicted by an econometric model fitted to the precontrol period.
Since the reliability of econometric inflation equations is subject to doubt in
light of their inaccurate predictions in the late 1960s, a substantial portion
of the paper is devoted to an assessment of the stability of the coefficients in
several recently published wage equations.

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