How curvy is the Phillips curve?

Philip Bunn (), Lena Anayi (), Nicholas Bloom, Paul Mizen, Gregory Thwaites () and Ivan Yotzov
Additional contact information
Philip Bunn: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Lena Anayi: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Gregory Thwaites: University of Nottingham

No 1107, Bank of England working papers from Bank of England

Abstract: Macro data suggest a convex relationship between inflation and economic slack, but identifying causality in this setting is challenging. Using data from large panel surveys of UK and US firms we show that the response of prices to demand shocks is also convex at the firm level. We obtain similar results using three different empirical exercises examining: the impact of Covid demand shocks, the response to sales shocks, and hypothetical shocks from a survey question. This convexity is strongest in firms and industries with higher inflation, disappears in horizons beyond two years, and is also present in response to cost shocks. We rationalise these findings in a menu cost model with positive trend inflation and decreasing returns at the firm level, which replicates firm and aggregate Phillips curve convexity. The non‑linearity emerges from trend inflation pushing firms closer to their price increase thresholds.

Keywords: Inflation; survey data; firms; Phillips curve (search for similar items in EconPapers)
JEL-codes: C83 D22 D84 E31 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2025-01-10
New Economics Papers: this item is included in nep-mon
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Related works:
Working Paper: How Curvy is the Phillips Curve? (2024)
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