Working Paper: CEPR ID: DP16583
Authors: Kristin Forbes; Joseph Gagnon; Christopher Collins
Abstract: This paper finds strong support for a Phillips curve that becomes nonlinear when inflation is “low”— which our baseline model defines as less than 3 percent. The nonlinear curve is steep when output is above potential (slack is negative) but flat when output is below potential (slack is positive) so that further increases in economic slack have little effect on inflation. This finding is consistent with evidence of downward nominal wage and price rigidity. When inflation is high, the Phillips curve is linear and relatively steep. These results are robust to placing the threshold between the high and low inflation regimes at 2, 3, or 4 percent inflation or for a threshold based on country-specific medians of inflation.In this nonlinear model, international factors play a large role in explaining headline inflation (albeit lessso for core inflation), a role that has been increasing since the global financial crisis.
Keywords: economic slack; globalization; output gap; price dynamics; monetary policy
JEL Codes: E31; E37; E52; E58; F62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic slack (E24) | Inflation (E31) |
| Low inflation (E31) | Slope of Phillips curve (E31) |
| High inflation (E31) | Slope of Phillips curve (E31) |
| International variables (F29) | Domestic slack coefficients (C51) |