Working Paper: NBER ID: w20715
Authors: Laurence Ball; Sandeep Mazumder
Abstract: This paper examines the recent behavior of core inflation in the United States. We specify a simple Phillips curve based on the assumptions that inflation expectations are fully anchored at the Federal Reserve’s target, and that labor-market slack is captured by the level of short-term unemployment. This equation explains inflation behavior since 2000, including the failure of high total unemployment since 2008 to reduce inflation greatly. The fit of our equation is especially good when we measure core inflation with the Cleveland Fed’s series on weighted median inflation. We also propose a more general Phillips curve in which core inflation depends on short-term unemployment and on expected inflation as measured by the Survey of Professional Forecasters. This specification fits U.S. inflation since 1985, including both the anchored-expectations period of the 2000s and the preceding period when expectations were determined by past levels of inflation.
Keywords: Phillips curve; inflation expectations; short-term unemployment; core inflation
JEL Codes: E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anchored inflation expectations (E31) | actual inflation (E31) |
| short-term unemployment (J64) | core inflation (E31) |
| anchored inflation expectations prevents inflation from declining significantly during high unemployment (E31) | actual inflation (E31) |
| average level of short-term unemployment (J64) | core inflation (E31) |
| core inflation depends on anchored inflation expectations and average level of short-term unemployment (E31) | core inflation (E31) |