Chris House writes,

If the 1 percent reduction in core inflation is sufficient for the Keynesian model to generate the huge recession we just went through then where was the huge recession in the late 1990s? Where was the enormous recession in 1986?

I think I made this point somewhere along the way, also.

When the Phillips Curve was trumpeted by Samuelson and Solow, the thinking was that causality ran from unemployment to (wage) inflation. In the 1970s, the idea was that causality ran from inflation to unemployment. This latter view is what is now impossible to defend. To the extent that New Keynesians accept the inflation-to-unemployment causality story (which they seemed to do), they are in trouble as I see it.

However, even for older Keynesians, who look at the causality as unemployment-to-inflation, recent experience is somewhat puzzling. I wrote this in 2010:

Looking ahead, the next 12 to 18 months should be interesting. The unemployment rate has been so far above 6 percent for so long that if the Fuhrer equation holds up, we should be seeing some pretty strong downward pressure on inflation. Instead, if inflation remains between 0 and 2 percent, this will look to me like another anomaly for the Phillips Curve.

But, you know, the beauty of 1970s undergraduate textbook macro is that you can use it to tell a story for anything. What we seem to be getting is a story that suggests a zero lower bound for inflation. You cannot cut nominal wages, so there.

Mark Thoma has more links, and his conclusion is worth quoting:

this is an empirical question that will be difficult to resolve empirically (because there are so many different ways to estimate a Phillips curve, and different specifications give different answers, e.g. which measure of prices to use, which measure of aggregate activity to use, what time period to use and how to handle structural and policy breaks during the period that is chosen, how should natural rates be extracted from the data, how to handle non-stationarities, if we measure aggregate activity with the unemployment rate, do we exclude the long-term unemployed as recent research suggests, how many lags should be included, etc., etc.?).

Also, read the follow-up. The phrase “an empirical question that will be difficult to resolve empirically” pretty much sums up macroeconomics, as far as I am concerned.