The L-Shaped Phillips Curve: Theoretical Justification and Empirical Implications

Narayana Kocherlakota

No 24086, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper has two parts. In the first part, I demonstrate that, in the absence of price and wage bounds, monetary models do not have current equilibria - and so lack predictive content - for a wide range of possible policy rules and/or beliefs about future equilibrium outcomes. This non-existence problem disappears in models in which firms face (arbitrarily loose) finite upper bounds on prices or positive lower bonds on nominal wages. In the second part, I study the properties of a class of dynamic monetary models with these kinds of bounds on prices/wages. Among other results, I show that these models imply that the Phillips curve is L-shaped, are consistent with the existence of permanently inefficiently low output (secular stagnation), and do not imply that forward guidance is surprisingly effective. I show too that economies with lower nominal wage floors have even worse equilibrium outcomes in welfare terms. It follows that models with arbitrarily low but positive nominal wage floors are not well approximated by models without wage floors.

JEL-codes: E10 E12 E31 E43 E52 (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-mac and nep-mon
Note: EFG
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Citations: View citations in EconPapers (2)

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