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Non-Linear Phillips Curves with Inflation Regime-Switching

Jeremy J. Nalewaik

No 2016-078, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Building on the results in Nalewaik (FEDS 2015-93), this work models wage growth and core PCE price inflation as regime-switching processes, whose characteristics in the 1970s, 1980s and early 1990s differ fundamentally from their characteristics in the 1960s and from the mid-1990s to present. The key innovation here is the addition to the models of fundamental driving variables like labor-market slack, and the evidence strongly suggests a non-linear effect of slack on wage growth and core PCE price inflation that becomes much larger after labor markets tighten beyond a certain point. The results are informative for assessing the likelihood and risks of meeting certain inflation targets on a sustained basis.

Keywords: Markov-switching; NAIRU; threshold regressions; Wage Inflation; Core PCE prices (search for similar items in EconPapers)
JEL-codes: C22 E31 E37 E51 E58 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2016-08
New Economics Papers: this item is included in nep-cba and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-78

DOI: 10.17016/FEDS.2016.078

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