 The hockey stick Phillips curve and the effective lower boundGregor Boehl and Philipp Lieberknecht Journal of Economic Dynamics and Control, 2025, vol. 170, issue C Abstract: We show that the interplay between a binding effective lower bound (ELB) on nominal interest rates and the costs of external financing weakens the disinflationary effect of financial shocks. In normal times, the real costs of production factors dominate in firms' marginal costs and are therefore key for inflation dynamics. In contrast, financing costs normally play a subordinate role as higher credit spreads are balanced-out by lower nominal rates. At the ELB, however, higher spreads following financial shocks can offset the effect of lower production factor costs on firms' price setting. The relationship between inflation and output hence features a hockey stick shape: the Phillips curve is flat at the ELB, but conventionally upward-sloping during normal times. This mechanism also weakens the power of forward guidance at the ELB, since such policy reduces spreads and financing costs. Keywords: Phillips curve; Financial frictions; Effective lower bound; Disinflation; Forward guidance (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:170:y:2025:i:c:s0165188924001945 DOI: 10.1016/j.jedc.2024.105002 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
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