Does the US economy face a long run trade off between inflation and unemployment?

Jamil Sayeed, Md. Deen Islam and Shanjida Yasmin

International Journal of Monetary Economics and Finance, 2019, vol. 12, issue 2, 118-132

Abstract: As average inflation expectations anchored at the inflation target since 2000 in the USA, the long run Phillips curve may have become downward sloping. Since the great recession 2008-2009, the US economy has experienced an average of 0.22% points of undershooting of the inflation target over the period 2008Q1-2017Q4. This study finds that the long run Phillips curve for the USA has become flatter since 2008. Our estimates show that the US economy faced 1.6% points of higher average unemployment than what would have been the case if average inflation had been equal to the target. This is a significant unemployment cost resulting from both a flatter long run Phillips curve and an undershooting of the inflation target. Our findings suggest that the US economy has been facing a long run trade off between inflation and unemployment since the financial crisis.

Keywords: Phillips curve; undershooting; unemployment cost; inflation target; great recession. (search for similar items in EconPapers)
Date: 2019
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