Revisiting the Phillips and Beveridge Curves: Insights from the 2020s Inflation Surge

Pierpaolo Benigno and Gauti Eggertsson

No 33095, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper reexamines the Phillips and Beveridge curves to explain the inflation surge in the U.S. during the 2020s. We argue that the pre-surge consensus regarding both curves requires substantial revision. We propose that the Inverse-L (INV-L) New Keynesian Phillips Curve replace the standard New Keynesian Phillips Curve. The INV-L curve is piecewise-linear and more sensitive to labor market conditions when it crosses the Beveridge threshold — a point at which the labor market becomes excessively tight and enters a "labor shortage" regime. We introduce a modified Beveridge curve that features a near-vertical slope once the Beveridge threshold is passed, suggesting that in this region, adjustment in labor market tightness occurs almost exclusively through a drop in vacancies rather than an increase in unemployment. This feature matches the U.S. experience since the Federal Reserve's tightening cycle began in March 2022. We also observe a similar pattern in the data during five other inflation surges over the past 111 years where the Beveridge threshold was breached. We define a Beveridge-threshold (BT) unemployment rate. Once unemployment falls below this rate, policymakers must be alert to sharp inflationary pressures from demand or supply shocks. We explore several policy implications.

JEL-codes: E0 E30 E40 E42 E44 E47 E49 E5 E51 E58 J20 J39 (search for similar items in EconPapers)
Date: 2024-10
New Economics Papers: this item is included in nep-lma and nep-mon
Note: ME
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