Has the US Phillips curve always been flat?
Hazell et al. derived regional Phillips curves by constructing state-level price indexes for nontraded goods and services. Their model clarifies the interpretation of the slope of regional Phillips curves relative to that of the aggregate Phillips curve.
Our cross-sectional estimates indicate that the Phillips curve is very flat and was very flat even during the 1980s: a one percentage point increase in unemployment lowered inflation over time by a mere 0.46 percentage points in the 1980s. This implies that the 5 percentage points increase in unemployment during the Volcker disinflation lowered inflation by only about 2.3 percentage points. […]This contrasts sharply with empirical specifications that make use of time series variation: a specification without time fixed effects yields a 45 times steeper Phillips curve for the pre-1990 sample. We interpret this as evidence that shifting long-run inflation expectations seriously confound estimates of the Phillips curve based on time series variation in the pre-1990 sample.
Their results shed a different light on the dynamics of the US inflation during the 1980s and after the 1990s:
- There has been no missing disinflation or missing reinflation over the past few business cycles;
- 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.
The Slope of the Phillips Curve: Evidence from U.S. States
Authors: Jonathon Hazell, Juan Herreño, Emi Nakamura, Jón Steinsson
From: Princeton University, University of California, Berkeley, Columbia University
What if the Phillips curve is hibernating
Hooper et al. in this paper assess the performance of the conventional expectations-augmented Phillips curve for both prices and wages, based on both historical macro or national level data and panel data for states and Metropolitan Statistical Areas. Some of their findings are:
- The price-Phillips curve might have substantial nonlinearities. However, the evidence from the post-1988 sample period is much less supportive of these nonlinearities. It is unclear which Phillips curve sample periods provides more reliable information about where the Phillips curve is now;
- The wage-Phillips curve is alive and well. The wage Phillips curve may have flattened some over time but it remains much steeper. Evidence of nonlinearities is much more robust than for the price Phillips curve in the post-1988 sample period.
Prospects for inflation in a high pressure economy: Is the Phillips curve dead or is it just hibernating?
Authors: Peter Hooper, Frederic S. Mishkin, Amir Sufi
From: Deutsche Bank Securities, Columbia University, University of Chicago
