Revisiting the Phillips and Beveridge Curves: Insights from the 2020s Inflation Surge

Pierpaolo Benigno and Gauti Eggertsson

No 19561, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper reexamines the Phillips and Beveridge curves to explain the inflation surge in the U.S. during the 2020s. We argue that the pre-surge consensus regarding both curves requires substantial revision. We propose the Inverse-L (INV-L) New Keynesian Phillips Curve as a replacement for the standard New Keynesian Phillips Curve. The INV-L curve is piecewise-linear and more sensitive to labor market conditions when it crosses the Beveridge threshold -- a point at which the labor market becomes excessively tight and enters a "labor shortage" regime. We introduce a modified Beveridge curve that features a near-vertical slope once the Beveridge threshold is passed, suggesting that in this region, adjustment in labor market tightness occur almost exclusively through a drop in vacancies rather than an increase in unemployment. This feature matches the U.S. experience since the Federal Reserve's tightening cycle began in March 2022. We also observe a similar pattern in the data during five other inflation surges over the past 111 years where the Beveridge threshold was breached. We define a Beveridge-threshold (BT) unemployment rate. Once unemployment falls below this rate, policymakers need to be alert to sharp inflationary pressures arising from demand or supply shocks. We explore several policy implications.

Keywords: Inflation; Labor market slack (search for similar items in EconPapers)
JEL-codes: E40 (search for similar items in EconPapers)
Date: 2024-10
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