Which nonlinearity in the Phillips curve? The absence of accelerating deflation in Japan

Emmanuel De Veirman

No DP2007/14, Reserve Bank of New Zealand Discussion Paper Series from Reserve Bank of New Zealand

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, albeit moderately negative, inflation. We document that this episode is most convincingly interpreted as reflecting a gradual flattening of the Phillips curve. Our analysis sheds light on the determinants of the 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.

JEL-codes: C22 C32 E31 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2007-09
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Working Paper: Which Nonlinearity in the Phillips Curve? The Absence of Accelerating Deflation in Japan (2007)
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