Working Paper: NBER ID: w31197
Authors: Pierpaolo Benigno; Gauti B. 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: inflation; Phillips curve; labor market; monetary policy
JEL Codes: E12; E3; E30; E40; E50; E60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| labor market tightness (J20) | inflation (E31) |
| high ratio of job vacancies to unemployed workers (J68) | labor market tightness (J20) |
| labor market tightness (J20) | upward pressure on wages (J39) |
| upward pressure on wages (J39) | inflation (E31) |
| tight labor market (vacancy-to-unemployed ratio > 1) (J69) | stronger relationship with inflation (E31) |
| decrease in inflation (E31) | smaller increase in unemployment (J65) |
| appropriate monetary policy (E63) | lower inflation (E31) |