Behavioural economics and the Phillips curve: new evidence from sectoral survey data

Abstract

Behavioural economics has a long record of providing insights into the inflation process. This study continues this tradition by adding to the current debate on the Phillips curve. We study data from periodic surveys of producing firms for Germany and Switzerland. The New Keynesian Phillips curve (NKPC) holds that prices are set by forward-looking firms. In this perspective the expectations that drive prices relate to prospective prices within the industry. By contrast, an older tradition sees expectations of economy-wide inflation as a key driving variable. With sectoral survey data we can address this debate and find support for the modern view of the price setting process. The results of our econometric estimates suggest that price setting has essentially remained unchanged in the years after the great recession. In conclusion, both policy makers and researchers continue to benefit from tools carved out by behavioural economists.