Working Paper: NBER ID: w25511
Authors: Olivier Coibion; Yuriy Gorodnichenko; Mauricio Ulate
Abstract: The length of the recovery since the Great Recession and the low reported levels of the unemployment rate in the U.S. are increasingly generating concerns about inflationary pressures. We document that an expectations-augmented Phillips curve can account for inflation not just in the U.S. but across a range of countries, once household or firm-level inflation expectations are used. Given this relationship, we can infer the dynamics of slack from the dynamics of inflation gaps and vice versa. We find that the implied slack was pushing inflation below expectations in the years after the Great Recession but the global and U.S. inflation gaps have shrunk in recent years thus suggesting tighter economic conditions. While we find no evidence that inflation is on the brink of rising, the sustained deflationary pressures following the Great Recession have abated.
Keywords: No keywords provided
JEL Codes: E24; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| implied slack (J22) | inflation below expectations (E31) |
| shrinking global inflation gap (F62) | tightening economic conditions (E66) |
| inflation gap (E31) | unemployment gap (J64) |
| unemployment gap (J64) | inflation gap (E31) |