The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times

Richard Crump, Stefano Eusepi, Marc Giannoni and Aysegul Sahin

No 1086, Staff Reports from Federal Reserve Bank of New York

Abstract: Using a New Keynesian Phillips curve, we document the rapid and persistent increase in the natural rate of unemployment, ut*, in the aftermath of the pandemic and characterize its implications for inflation dynamics. While the bulk of the inflation surge is attributed to temporary supply factors, we also find an important role for current and expected negative unemployment gaps. Through the lens of the model, the 2022-23 disinflation was driven by the expectation that the unemployment gap will close through a progressive decline in ut* and a rise in the unemployment rate. This implies that convergence to long-run price stability depends critically on expectations about labor market tightness. Using a variety of cross-sectional data sources, we provide corroborating evidence of unusually tight labor market conditions, consistent with our estimated rise in ut*.

Keywords: Phillips curve; unemployment; inflation; natural rate of unemployment; expectations (search for similar items in EconPapers)
JEL-codes: D84 E24 E31 E32 J11 (search for similar items in EconPapers)
Pages: 43
Date: 2024-03-01
New Economics Papers: this item is included in nep-lab and nep-mac
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The unemployment–inflation trade-off revisited: The Phillips curve in COVID times (2024)
Working Paper: The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times (2022)
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DOI: 10.59576/sr.1086

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