Which Nonlinearity in the Phillips Curve? The Absence of Accelerating Deflation in Japan

Emmanuel De Veirman

Economics Working Paper Archive from The Johns Hopkins University,Department of Economics

Abstract: It is standard to model the output-inflation trade-off as a linear relationship with a time-invariant slope. We assess empirical evidence for three types of nonlinearity in the short-run Phillips curve. At an empirical level, we aim to discover why large negative output gaps in Japan during the period 1998-2002 did not lead to accelerating deflation, but instead coincided with stable, be it moderately negative inflation. We document that this episode is most convincingly interpreted as reflecting a gradual flattening of the Phillips curve. The broader relevance of our analysis lies in its attempt to shed light on the determinants of such time-variation in the Phillips curve slope. Our results suggest that, in any economy where trend inflation is substantially lower (or substantially higher) today than in past decades, time-variation in the slope of the short-run Phillips curve has become too important to ignore.

Date: 2007-01
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (26)

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Related works:
Journal Article: What Makes the Output-Inflation Trade-Off Change? The Absence of Accelerating Deflation in Japan (2009)
Working Paper: Which nonlinearity in the Phillips curve? The absence of accelerating deflation in Japan (2007)
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