Working Paper: NBER ID: w25792
Authors: Peter Hooper; Frederic S. Mishkin; Amir Sufi
Abstract: This paper reviews a substantial range of empirical evidence on whether the Phillips curve is dead, i.e. that its slope has flattened to zero. National data going back to the 1950s and 60s yield strong evidence of negative slopes and significant nonlinearity in those slopes, with slopes much steeper in tight labor markets than in easy labor markets. This evidence of both slope and nonlinearity weakens dramatically based on macro data since the 1980s for the price Phillips curve, but not the wage Phillips curve. However, the endogeneity of monetary policy and the lack of variation of the unemployment gap, which has few episodes of being substantially below zero in tis sample period, makes the price Phillips curve estimates from this period less reliable. At the same time, state level and MSA level data since the 1980s yield significant evidence of both negative slope and nonlinearity in the Phillips curve. The difference between national and city/state results in recent decades can be explained by the success that monetary policy has had in quelling inflation and anchoring inflation expectations since the 1980s. We also review the experience of the 1960s, the last time inflation expectations became unanchored, and observe both parallels and differences with today. Our analysis suggests that reports of the death of the Phillips curve may be greatly exaggerated.
Keywords: Phillips Curve; Inflation; Monetary Policy; High-Pressure Economy
JEL Codes: E31; E52; E65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| National data since the 1980s show a flattening of the price Phillips Curve (E31) | The relationship between unemployment and inflation has weakened significantly (F66) |
| Monetary policy's success in anchoring inflation expectations since the 1980s (E31) | Contributed to the flattening of the price Phillips Curve (E31) |
| Current high-pressure economy characterized by low unemployment rates (E24) | Has not led to significant inflation increases (E31) |
| Labor market continues to tighten (J20) | Risk of inflation accelerating (E31) |
| Endogeneity of monetary policy (E19) | Obscures the true relationship between unemployment and inflation (E31) |