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The rate of inflation fell far less over the period 2007-2013 than in the period 1979-1985 despite similar large increases in the unemployment rate. This paper asks why. Possible explanations include a change in the persistence of inflation, changes in NAIRU, and other shocks. A change in the persistence of inflation, with inflation more anchored in the period 2007-2013 than in the period 1979-1985, is found to be important. The level and change in the NAIRU cannot be precisely estimated, but the data suggest an increase of nearly 1 percentage point since 2007.

IN A RECENT ARTICLE. GERTLER (1982) PRESENT A MODEL THAT EXPLAINS CERTAIN STYLIZED FACTS CONCERNING THE RELATIVE BEHAVIOUR OF THE MONEY SUPPLY AND NOMINAL WAGES. ONE ADDITONAL FEATURES OF THE MODEL IS THE BEHAVIOUR OF REAL OUTPUT, WHICH IS FOUND TO HAVE A SERIALLY CORRELATED RESPONSE TO A MONEY SUPPLY SHCOK. THIS SERIAL CORRELATION APPEARS TO ARISE FRTOM AN INFORMATION STRUCTURE THAT PRECLUDED AGENTS FROM DIRECTLY DISENTANGLING PERM ANENT VERSUS TRANSITORY MOVEMENTS IN RELEVANT STATE VARIABLES. THIS INFORMATION STRUCTURE COMPLICATES THE FORECASTING PROBLEM THAT MUST BE SOLVED TO ANALYZE THE MODEL AND AFFECTS THE BEHAVIOUR OF WAGES AND THE VAIRANCE OF OUTPUT. IT WILL NOT. HOWEVER, LEAD TO SERIAL CORRLEATION IN REAL OUTPUT. AN ALGEBRAIC ERROR IS RESPONSIBLE FOR THE SERIAL CORRELATION FOUND BY GERTLER. THIS NOTE CORRECT THE ERROR AND PRESENTS AN ALTERNATIVE SOLUTION TO THE FORECASTING PROBLEM. GERTLER CONSTRUCTS FORECASTS OF THE RELEVANT STATE VARIABLE THROUGH THE USE OF A KALMAN FILTER. WHILE THIS TECHNIQUE IS APPROPRIATE FOR THE PROBLEM, A SIMPLER SOLUTION IS AVAILABLE. THIS SOLUTION IS BASED ON AN EQUIVALENT REPRESENTATION OF THE STOCHASTIC PROCESS GENERATING THE DISTURBANCES OF THE MODEL. THIS EQUIVALENT REPRESENTATION CAN THEN BE USED, IN A STRAIIGHTFORWARD WAY, TO DESCRIBE WAGE DYNAMICS AND THE VARIANCE OF REAL OUTPUT.