Working Paper: CEPR ID: DP18116
Authors: Pierpaolo Benigno; Gauti Eggertsson
Abstract: This paper proposes a non-linear New Keynesian Phillips curve (Inv-L NK Phillips Curve) to explain the surge of inflation in the 2020s. Economic slack is measured as firms' job vacancies over the number of unemployed workers. After showing empirical evidence of statistically significant nonlinearities, we propose a New Keynesian model with search and matching frictions, complemented by a form of wage rigidity, in the spirit of Phillips (1958), that generates strong nonlinearities. Policy implications include the thesis that appropriate monetary policy can bring inflation down without a significant recession and that the recent inflationary surge was mostly generated by a "labor shortage" -- i.e. an exceptionally tight labor market.
Keywords: Nonlinear Phillips Curve; Inflation; Labor Market; Monetary Policy
JEL Codes: E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| INVL NK Phillips curve (E31) | sharp rise in inflation in the US during the early 2020s (E31) |
| demand shocks (E39) | sharp rise in inflation in the US during the early 2020s (E31) |
| appropriate monetary policy (E63) | reduce inflation (E31) |
| labor shortage (J23) | sharp rise in inflation (E31) |
| labor market tightness (job vacancies to unemployed workers) (J60) | steepen slope of the Phillips curve (E31) |
| nonlinearities in the Phillips curve (E31) | inflation dynamics (E31) |