Did the Global Financial Crisis Break the U.S. Phillips Curve?

Stefan Laséen () and Marzie Taheri Sanjani

No 2016/126, IMF Working Papers from International Monetary Fund

Abstract: Inflation dynamics, as well as its interaction with unemployment, have been puzzling since the Global Financial Crisis (GFC). In this empirical paper, we use multivariate, possibly time-varying, time-series models and show that changes in shocks are a more salient feature of the data than changes in coefficients. Hence, the GFC did not break the Phillips curve. By estimating variations of a regime-switching model, we show that allowing for regime switching solely in coefficients of the policy rule would maximize the fit. Additionally, using a data-rich reduced-form model we compute conditional forecast scenarios. We show that financial and external variables have the highest forecasting power for inflation and unemployment, post-GFC.

Keywords: WP; Phillips curve; Inflation; Unemployment; Financial Frictions; Conditional Forecast; Regime Switching; Bayesian Estimation; PCE inflation; inflation expectation; inflation process; inflation equation; inflation dynamics; inflation-unemployment dynamics; shock variance; inflation gap; coefficient switching; inflation response; inflation goal; univariate Phillips curve equation; Unemployment rate; Global financial crisis of 2008-2009; Total factor productivity; Global (search for similar items in EconPapers)
Pages: 42
Date: 2016-07-05
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Citations: View citations in EconPapers (8)

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