Working Paper: CEPR ID: DP17974
Authors: Sree Kochugovindan; Jeremy Lawson
Abstract: Using panel data techniques, we draw on the Phillips curve framework to address gaps in the cross-country inflation literature. We provide a comprehensive assessment of the relative contributions of cyclical and structural drivers to inflation dynamics, the latter including globalisation, innovation, and demographics. We also assess how parameters vary across advanced and emerging economies, as well as goods and services sectors.Our results highlight the importance of both backward and forward-looking inflation expectations, and in turn monetary policy credibility. While structural factors play a role in inflation dynamics, their influence is modest, felt over many years and able to be offset by central banks. Supply-side drivers should be thought of as headwinds or tailwinds rather than true determinants of inflation in the medium and long term, though, we do find evidence that globalisation and technological innovation helped flatten the Phillips curve in the 20-years before the pandemic. This implies some risk of re-steepening if the trend towards the fragmentation of the global trading system were to continue, though technological progress continues to work in the opposite direction.Finally, we investigate whether the pandemic has served to alter the position or slope of the Phillips curve. We think the evidence is more consistent with the pandemic helping uncover a steeper section of the curve rather than causing a more fundamental shift or steepening over more normal ranges for economic slack. But that benign conclusion is contingent on central banks doing what is necessary to return inflation swiftly to their targets.
Keywords: monetary policy; inflation; innovation; phillips curve; demographics; globalisation
JEL Codes: E31; E37; E52; J11; J21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| backward and forward-looking inflation expectations (D84) | inflation (E31) |
| structural factors (L10) | inflation (E31) |
| globalisation and technological innovation (O35) | Phillips curve (E31) |
| pandemic (F44) | steeper section of Phillips curve (E31) |
| demographic factors (J11) | inflation (E31) |
| domestic slack (D13) | inflation (E31) |
| oil prices (L71) | inflation (E31) |
| commodity prices (Q02) | inflation (E31) |
| global slack (J89) | inflation (E31) |
| trade integration (F15) | inflation (E31) |