Slope Of Phillips Curve Research Articles

Did Monetary Policy Kill the Phillips Curve? Some Simple Arithmetics

Abstract An apparent disconnect has taken place between inflation and economic activity in the pre-COVID US economy, causing some to believe that the Phillips curve has flattened. We argue that this view may be premature. Using New Keynesian theory and estimated SVAR models, we decompose fluctuations in US macro data into the components driven by demand and supply disturbances, and confront the inflation disconnect with some simple arithmetics. This exercise confirms a relatively stable Phillips curve slope while the demand curve has flattened substantially. Our results are consistent with a shift towards firmer monetary policy commitment to inflation stability.

Price setting frequency and the Phillips curve

We develop a New Keynesian (NK) model with endogenous price setting frequency. Whether a firm updates its price is a discrete choice: when expected benefits outweigh expected costs, prices are reset optimally. The model gives rise to a non-linear Phillips curve as prices are more flexible during demand-driven expansions and less so during demand-driven recessions. Monetary policy can have substantial real effects despite the model having a state-dependent pricing component. Our quantitative analysis shows that contrary to the standard NK model, the assumed price setting behavior: (i) is consistent with micro data on price setting frequency; (ii) generates a direct effect of the time-varying price setting frequency on inflation; (iii) creates time-variation in the Phillips curve slope that explains shifts in the Phillips curve associated with different historical episodes; (iv) explains inflation dynamics without relying on implausible high cost-push shocks and nominal rigidities inconsistent with micro data; (v) reconciles the NK model with observed inflation moments.

A time-varying Phillips curve with global factors: Are global factors important?

Increased globalization and trade have integrated the world, but whether they are the underlying drivers of the flattening of the Phillips curve slope is not clear. This problem is further complicated since time-varying parameters are empirically important in most applications as the role of global factors may change over time. This paper investigates empirically the role played by global and domestic factors in driving dynamics in inflation using a panel data comprising of 23 advanced (AEs) and 11 emerging market economies (EMEs), from 1995Q1 to 2018Q1. The results indicate the predominance and increasing importance of global factors in explaining inflation dynamics, especially for EMEs. The Phillips curve is flat for both groups, but it is flatter in AEs. The results are consistent with the theoretical view that increased globalization and trade are underlying factors behind the flattening of the Phillips curve.

Trend inflation and implications for the Phillips Curve

This Economic Commentary estimates trend PCE inflation and a Phillips curve with time-varying parameters while allowing for trend inflation to affect the frequency at which firms change prices. Since the beginning of 2021, trend PCE inflation has risen well above the FOMC’s 2 percent long-term inflation target, and the most recent estimate of trend inflation in 2022:Q4 is 3.4 percent. With the increase in trend inflation, the Phillips curve slope has risen above its pre-pandemic level. At the same time, the relationship between current inflation and inflation expectations has strengthened. Together, these results imply that even though a slowing economy would help to bring down inflation through the steeper slope of the Phillips curve, high short-term inflation expectations could put upward pressure on inflation to a larger extent than they had prior to the pandemic.

Revisiting the Phillips curve for Indonesia: What can we learn from regional data?

This study seeks new empirical evidence of the Phillips curve in Indonesia, an emerging and geographically diversified economy. There are three important contributions from this research. First, applying panel econometric method to exploit regional variation, the study resolves the issue of using on-target national inflation rates that potentially causes weakening inflation-output link. Second, the research examines the relevance of mining industry for output gap measurement at regional level. Third, it highlights the differences in the Phillips curve between the west and east regions owing to their different underlying economic structures. Our estimation using regional data support the validity of the Phillips curve relationship in Indonesia. Backward-looking inflation expectations, exchange rate dynamics and international prices also significantly affect inflation. In addition, the effect of output gap on inflation is larger if the mining sector is excluded from output gap measurement. Finally, we find apparent differences between the west and the eastern regions in the slope of Phillips curve, as well as in the degree of inflation persistence and exchange rate pass-through. The results are robust to alternative specification. Our study adds significantly to the empirical literature on the Phillips curve and have meaningful policy implications.

How Does the Phillips Curve Slope Vary with Repricing Rates?

How Does the Phillips Curve Slope Vary with Repricing Rates?

Globalisation and the slope of the Phillips curve

We study the effects of globalisation on the slope of the New Keynesian Phillips curve for CPI inflation, based on a panel of 35 countries. We find that the output gap generally has a significant positive effect on inflation, but that this effect decreases as integration in the global economy increases. We conclude that the advance of globalisation has been a key force behind the flattening of price Phillips curves.

The Slope of the Phillips Curve: Evidence from U.S. States

AbstractWe estimate the slope of the Phillips curve in the cross section of U.S. states using newly constructed state-level price indices for nontradeable goods back to 1978. Our estimates indicate that the slope of the Phillips curve is small and was small even during the early 1980s. We estimate only a modest decline in the slope of the Phillips curve since the 1980s. We use a multiregion model to infer the slope of the aggregate Phillips curve from our regional estimates. Applying our estimates to recent unemployment dynamics yields essentially no missing disinflation or missing reinflation over the past few business cycles. Our results imply that the sharp drop in core inflation in the early 1980s was mostly due to shifting expectations about long-run monetary policy as opposed to a steep Phillips curve, and the greater stability of inflation between 1990 and 2020 is mostly due to long-run inflation expectations becoming more firmly anchored.

How Does the Phillips Curve Slope Vary with Repricing Rates?

How Does the Phillips Curve Slope Vary with Repricing Rates?

Dynamic Rational Inattention and the Phillips Curve

We develop a fast, tractable, and robust method for solving the transition path of dynamic rational inattention problems in linear-quadratic-Gaussian settings. As an application of our general framework, we develop an attention-driven theory of dynamic pricing in which the Phillips curve slope is endogenous to systematic aspects of monetary policy. In our model, when the monetary authority is more committed to stabilizing nominal variables, rationally inattentive firms pay less attention to changes in their input costs, which leads to a flatter Phillips curve and more anchored inflation expectations. This effect, however, is not symmetric. A more dovish monetary policy flattens the Phillips curve in the short-run but generates a steeper Phillips curve in the long-run. In a calibrated version of our general equilibrium model, we find that our mechanism quantifies a 75% decline in the slope of the Phillips curve in the post-Volcker period, relative to the period before it.

Globalisation and the Slope of the Phillips Curve

We study the effects of globalisation on the slope of the New Keynesian Phillips curve for CPI inflation, based on a broad panel of 35 countries and controlling for possibly non-linear exchange rate effects. We find that the output gap generally has a significant positive effect on inflation, but that this effect decreases as integration in the global economy increases. We conclude that the advance of globalisation has been a key force behind the flattening of price Phillips curves across the world.

The Phillips multiplier

The Phillips multiplier is a statistic to non-parametrically characterize the central bank inflation-unemployment trade-off. Inference on the Phillips multiplier is based on a simple instrumental variable regression of cumulative inflation on cumulative unemployment using monetary shocks as instruments. We compute the Phillips multiplier for the US and the UK and document that the trade-off went from being large in the pre-1990 sample period to being small (but significant) post-1990. In contrast to earlier evidence of a flattening of the slope of Phillips curve, the decline in the trade-off is mostly due to the anchoring of inflation expectations.

The Slope of the Phillips Curve: Evidence from U.S. States

We estimate the slope of the Phillips curve in the cross section of U.S. states using newly constructed state-level price indexes for non-tradeable goods back to 1978. Our estimates indicate that the slope of the Phillips curve is small and was small even during the early 1980s. We estimate only a modest decline in the slope of the Phillips curve since the 1980s. We use a multi-region model to infer the slope of the aggregate Phillips curve from our regional estimates. Applying our estimates to recent unemployment dynamics yields essentially no missing disinflation or missing reinflation over the past few business cycles. Our results imply that the sharp drop in core inflation in the early 1980s was mostly due to shifting expectations about long-run monetary policy as opposed to a steep Phillips curve, and the greater stability of inflation since the 1990s is mostly due to long-run inflationary expectations becoming more firmly anchored. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Correlated Shocks, Hysteresis, and the Sacrifice Ratio: Evidence from India

ABSTRACT In an emerging market with frequent shocks output sacrifice from disinflation depends not only on the Phillips curve slope but also on shifts in demand and supply. Introducing shocks and correlations between shocks in a Kalman filter-based estimation, the slope flattens, correlation between permanent supply and gap demand shocks is negative and a new decomposition of output between trend and output gap shocks is obtained. The slope is robust to parameter changes and business cycle turning points are tracked well, but the decomposition varies. More stable inflation expectation and rise in forward-looking behavior increase the volatility of trend growth and reduces the output gap. Inflation targeting had such effects in India. Estimated sacrifice ratio varies with the period and method, but it rises to 6.7 over 2011–17 if such hysteresis is included. Simultaneous equation estimation corroborates the results. In the estimation period, inflation targeting affected expectations but not inflation.

Is the Phillips curve still alive? Evidence from the euro area

We estimate the Phillips curve for the euro area and its five largest economies over 1985–2017 using an unobserved component model for inflation and unemployment. Inflation expectations are modeled as the trend component of annualized HICP inflation. We have three results. First, the relationship between unemployment and inflation is negative and significant in the euro area, Germany, France, and the Netherlands. Second, the Phillips curve slope is heterogeneous across countries. Third, the slope has not changed significantly since the Global Financial Crisis.

Should we use linearized models to calculate fiscal multipliers?

SummaryWe calculate the magnitude of the government consumption multiplier in linearized and nonlinear solutions of a New Keynesian model at the zero lower bound. Importantly, the model is amended with real rigidities to simultaneously account for the macroeconomic evidence of a low Phillips curve slope and the microeconomic evidence of frequent price changes. We show that the nonlinear solution is associated with a much smaller multiplier than the linearized solution in long‐lived liquidity traps, and pin down the key features in the model which account for the difference. Our results caution against the common practice of using linearized models to calculate fiscal multipliers in long‐lived liquidity traps.

The end of Brazilian big inflation: lessons to monetary policy from a standard New Keynesian model

The paper analyzes economic stabilization in Brazil in the context of a New Keynesian model estimated with Bayesian techniques. Dataset covers the period 1975–2012. Our methodology is based on tests for multiple structural breaks at unknown dates and counterfactual exercises. The results show that inflation and output volatility present an inverted U-shape pattern, peaking at the 1985–1994 sample. Changes in the monetary policy stance and milder shocks accounted for the reduced inflationary volatility (about 50% each, in some specifications). However, some assumptions indicated that a sharp decline in the Phillips curve slope was also important for controlling inflation. Concerning to output, the sole explanation for its volatility fall seemed to be smaller shocks. Therefore, we conclude that a mix of the “good luck” and “good policy” hypotheses mainly originated the current period of increased stability in the country.

Will US inflation awake from the dead? The role of slack and non-linearities in the Phillips curve

The response of US inflation to the high levels of spare capacity during the Great Recession of 2007–09 was rather muted. At the same time, some have argued that the short-term unemployment gap has a more prominent role than the standard unemployment gap in determining inflation, and either the closing of this gap or non-linearities in the Phillips curve could lead to a sudden pick-up in inflation. In this context, our main aim is to provide guidance to policymakers as regards the reliability of the Phillips curve to forecast inflation. Our main findings from Phillips curves estimated since the early-1990s suggest that the consideration of a time-variation in the Phillips curve slope is more relevant than just focusing on finding the “correct” slack measure. Although the Phillips curve may be relatively flat over the full sample (1992Q1–2015Q1), time-varying estimates with rolling windows and with the Kalman filter suggest that the slope does vary over time and that it has increased slightly since 2013. These non-linear specifications outperform the benchmark linear model in an out-of-sample exercise. The main policy implication is that decision-makers should not exclude the possibility that inflation might rise suddenly given its non-linear behaviour, and more strongly than a linear model would dictate.

Should We Use Linearized Models to Calculate Fiscal Multipliers?

We calculate the magnitude of the government consumption multiplier in linearized and nonlinear solutions of a New Keynesian model at the zero lower bound. Importantly, the model is amended with real rigidities to simultaneously account for the macroeconomic evidence of a low Phillips curve slope and the microeconomic evidence of frequent price changes. We show that the nonlinear solution is associated with a much smaller multiplier than the linearized solution in long-lived liquidity traps, and pin down the key features in the model which account for the difference. Our results caution against the common practice of using linearized models to calculate fiscal multipliers in long-lived liquidity traps.

Should We Use Linearized Models to Calculate Fiscal Multipliers?

We calculate the magnitude of the government consumption multiplier in linearized and nonlinear solutions of a New Keynesian model at the zero lower bound. Importantly, the model is amended with real rigidities to simultaneously account for the macroeconomic evidence of a low Phillips curve slope and the microeconomic evidence of frequent price changes. We show that the nonlinear solution is associated with a much smaller multiplier than the linearized solution in long-lived liquidity traps, and pin down the key features in the model which account for the difference. Our results caution against the common practice of using linearized models to calculate fiscal multipliers in long-lived liquidity traps.