Abstract
The recent flattening of the Phillips curve has stimulated new empirical research and theoretical discussions regarding the nonlinear nature of the changes in the parameters. The objective of the present paper is twofold: to detect the relevant type of the implied nonlinearity and look for some general model capable of generating a Phillips curve mimicking the empirical one. We find evidence of a convex US price Phillips curve, from 1961 q1 to 2019 q4, assessed both by piecewise and threshold models. The result presents some degree of novelty regarding the role of supply shocks and model-specific convexities; in addition, it supports the use of a regime-switching macro system. The latter accomplishes three tasks. It can generate a Phillips curve resembling its empirical counterparts; it creates a medium-run endogenous cycle where unemployment is not a NAIRU; finally, it opens new perspectives on economic policy issues.
Highlights
The debate on the Phillips curve, present in the economic literature since its inception, has fluctuated in intensity depending on the conditions of the economy and the theoretical paradigms prevailing
For evidence on OECD countries see Turner et al (2019). 9According to the results reported in Table 1, the slope estimated in the piecewise model is -0.049 when the unemployment gap is positive and -0.423 when negative. 10Considering the average level of the natural rate of 5.5 in the period 1961q1-2018q2, a negative unemployment gap of -2 p.p. the log-transformed model would imply, ceteris paribus, an effect on inflation of -0.913·log(3.5/5.5)=0.412 while a positive unemployment gap of 2 p.p. would imply an effect of 0.913·log(7.5/5.5)=-0.283
We investigate the price Phillips curve nonlinearity on US quarterly data, from 1961 q1 to 2019 q4, and compare linear, log-transformed unemployment gap, piecewise linear and threshold models
Summary
The log-transformation of the unemployment gap, and with two more flexible specifications, based on piecewise linear regressions and threshold models The latter allow to test the type of nonlinearity, whether concavity or convexity and threshold models provide an estimated value of the unemployment gap in correspondence of which the slope of the Phillips curve changes. As it will be clear, this turns out to be half percentage point higher than the zero level assumed in the piecewise linear regressions.
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