The Intermittent Phillips Curve: Finding a Stable (But Persistence-Dependent) Phillips Curve Model Specification

Richard Ashley () and Randal Verbrugge

No 19-09R2, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We establish that the Phillips curve is persistence-dependent: inflation responds differently to persistent versus moderately persistent (or versus transient) fluctuations in the unemployment rate gap. This persistence-dependent relationship appears to align with business-cycle stages and is thus consistent with existing theory. Previous work fails to model this dependence, thereby finding numerous "inflation puzzles" – e.g., missing inflation/disinflation – noted in the literature. Our specification eliminates these puzzles; for example, the Phillips curve has not weakened, nor was inflation "stubbornly low" in 2019. The model's coefficients are stable, and it provides accurate conditional recursive forecasts through the Great Recession. There are important monetary policy implications.

Keywords: NAIRU; persistence dependence; recession gap; overheating; Phillips curve (search for similar items in EconPapers)
JEL-codes: C22 C32 E31 E32 E5 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2019-05-03, Revised 2023-02-14
New Economics Papers: this item is included in nep-ets and nep-mac
Note: *First posted May 2019 and originally titled “Variation in the Phillips Curve Relation across Three Phases of the Business Cycle.”; Appendix - https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/publications/working-papers/2023/wp1909r2-app.pdf
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DOI: 10.26509/frbc-wp-201909r2

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