Inflation Dynamics with a Generalized Lucas Phillips Curve

John Cochrane

No 33888, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: I investigate a generalized form of the Lucas (1972) Phillips curve, in which firms take varying amounts of time to learn aggregate demand, in standard textbook new-Keynesian models. This Phillips curve helps to reconcile the sharp divergence between the standard model on the one hand and the beliefs of most policy analysts and the available evidence on the other. In the standard model, inflation and output rise after interest rates rise, with only the possibility of a one-time downward jump. With the generalized Lucas Phillips curve, inflation is initially unstable, so a small initial disinflation builds up before turning around. The model preserves the desirable long-run stability and neutrality of the standard model.

JEL-codes: E31 E51 (search for similar items in EconPapers)
Date: 2025-06
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