Explaining Inflation in the Aftermath of the Great Recession

Robert Murphy ()

No 823, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper considers whether the Phillips curve can explain the recent behavior of inflation in the United States. Standard formulations of the model predict that the ongoing large shortfall in economic activity relative to full employment should have led to deflation over the past several years. I confirm previous findings that the slope of the Phillips curve has varied over time and probably is lower today than it was several decades ago. This implies that estimates using historical data will overstate the responsiveness of inflation to present-day economic conditions. I modify the traditional Phillips curve to explicitly account for time variation in its slope and show how this modified model can explain the recent behavior of inflation without relying on anchored expectations. Specifically, I explore reasons why the slope might vary over time, focusing on implications of the sticky-price and sticky-information approaches to price adjustment. These implications suggest that the inflation environment and uncertainty about regional economic conditions should influence the slope of the Phillips curve. I introduce proxies to account for these effects and find that a Phillips curve modified to allow its slope to vary with uncertainty about regional economic conditions can best explain the recent path of inflation.

Keywords: Inflation; Phillips curve; Great Recession; Sticky Information; Sticky Prices (search for similar items in EconPapers)
JEL-codes: E30 E31 (search for similar items in EconPapers)
Date: 2013-07-02, Revised 2014-10-18
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Published, Journal of Macroeconomics, 2014, 40, 228-244

Downloads: (external link)
http://fmwww.bc.edu/EC-P/wp823.pdf main text (application/pdf)

Related works:
Journal Article: Explaining inflation in the aftermath of the Great Recession (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:823

Access Statistics for this paper

More papers in Boston College Working Papers in Economics from Boston College Department of Economics Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F Baum ().