Can the Phillips Curve Explain Inflation over the Past Half-Century?

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Date: May 2019
Publisher: Springer
Document Type: Report
Length: 4,548 words
Lexile Measure: 1680L

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Abstract :

Standard Phillips curve models of price inflation suggest that the United States should have experienced an episode of deflation during the Great Recession and the subsequent sluggish recovery. Although inflation reached very low levels, prices continued to rise rather than fall. More recently, many observers have argued that inflation should have increased as the unemployment rate declined and labor markets tightened, but inflation has remained below the Federal Reserve's policy target. This paper confirms that the slope of the Phillips curve has declined over the past 50 years and is very close to zero today. The Phillips curve was modified to allow its slope to vary over time consistent with theories of price-setting behavior by firms when prices are costly to adjust and when information is costly to obtain or process. Adapting the Phillips curve to allow for time-variation in its slope helps explain the pattern of inflation, not only during and after the Great Recession, but also over the previous four decades. Keywords Inflation * Phillips curve * Great recession JEL E30-E31

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Gale Document Number: GALE|A592240265