Working Paper: NBER ID: w19442
Authors: Lars E.O. Svensson
Abstract: If inflation expectations become firmly anchored at the inflation target even when average inflation deviates from the target, the long-run Phillips curve becomes non-vertical. During 1997-2011, average inflation expectations in Sweden have been close to the inflation target of 2 percent, whereas average inflation has fallen short of the target by 0.6 percentage points. The estimates reported suggest that the slope of the long-run Phillips curve is about 0.75. Then the average unemployment rate has been about 0.8 percentage points higher than if average inflation had been on target. This is a large unemployment cost of undershooting the inflation target.
Keywords: inflation; unemployment; Phillips curve; monetary policy
JEL Codes: E24; E31; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| average inflation below target (E31) | long-run Phillips curve becomes downward-sloping (E31) |
| average inflation below credible target (E31) | average unemployment higher than if inflation were on target (E24) |
| 1 percentage point decrease in average inflation (E31) | increase in unemployment by 0.75 to 1.33 percentage points (J65) |
| average inflation falling short of the target (E31) | higher unemployment (J64) |