Low inflation bends the Phillips curve around the world: Extended results

Kristin Forbes, Joseph Gagnon and Christopher Collins ()

No WP21-15, Working Paper Series from Peterson Institute for International Economics

Abstract: This paper revises and extends PIIE Working Paper 20-6. It continues to find strong support for a Phillips curve that becomes nonlinear when inflation is "low"—which our baseline model defines as less than 3 percent. The nonlinear curve is steep when output is above potential (slack is negative) but flat when output is below potential (slack is positive) so that further increases in economic slack have little effect on inflation. This finding is consistent with evidence of downward nominal wage and price rigidity. When inflation is high, the Phillips curve is linear and relatively steep. These results are robust to placing the threshold between the high and low inflation regimes at 2, 3, or 4 percent inflation or for a threshold based on country-specific medians of inflation. In this nonlinear model, international factors play a large role in explaining headline inflation (albeit less so for core inflation), a role that has been increasing since the global financial crisis.

Keywords: economic slack; globalization; output gap; price dynamics (search for similar items in EconPapers)
JEL-codes: E31 E37 E52 E58 F62 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-mon
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:iie:wpaper:wp21-15

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