Can the Phillips curve provide answers to current high inflation rates

Hany Guirguis, Kelly Cwik, Joseph DeMauro and Michael Suen

Research in Economics, 2024, vol. 78, issue 2

Abstract: Motivated by the weak response of the inflation rate to the tight labor market, the Federal Reserve (Fed) Bank stepped away from its longstanding preemptive policy to fight inflation as the economy approached full employment. This paper aims to reevaluate the relationships of four measures of inflation with the unemployment rate. We accomplish this task by allowing the Phillips curve (PC) slope to vary over time and depend on the magnitude of the unemployment gap. Assessed by both PC convex specification assessment and the Markov chain Monte Carlo (MCMC) estimation method, we confirm the convexity of the PC when the unemployment gap is negative. In addition, we show that the slope of the PC more than doubled when we allow the coefficient on the economic slack to vary over time. Thus, our study shows that PC is still a relevant tool for guiding monetary policy.

Keywords: Phillips curve; Nonlinearity; Time-varying parameters; Markov chain Monte Carlo (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reecon:v:78:y:2024:i:2:s1090944324000206

DOI: 10.1016/j.rie.2024.100956

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