Inflation expectations and nonlinearities in the Phillips curve

Alexander Doser, Ricardo Nunes, Nikhil Rao and Viacheslav Sheremirov

No 17-11, Working Papers from Federal Reserve Bank of Boston

Abstract: This paper shows that a simple form of nonlinearity in the Phillips curve can explain why, following the Great Recession, inflation did not decrease as much as predicted by linear Phillips curves, a phenomenon known as the missing disinflation. We estimate a piecewise-linear specification and document that the data favor a model with two regions, with the response of inflation to an increase in unemployment slower in the region where unemployment is already high. Nonlinearities remain important, even when we account for other factors proposed in the literature, such as consumer expectations of inflation or financial frictions. However, studying a range of specifications with different measures of inflation and economic activity, we conclude that, in most cases, consumer expectations are more robust than nonlinearities. We find that the role of consumer expectations was especially important in the 1970s and ?80s, during a turbulent rise in inflation followed by the Volcker disinflation; the nonlinearities make disinflation more problematic and require the inflation expectations process to be more forward-looking during this period, thereby putting a larger weight on survey expectations. We conclude that a nonlinear Phillips curve with forward-looking survey expectations can be a useful tool to understand inflation dynamics during episodes of rapid disinflation and persistent inflation.

Keywords: inflation expectations; Phillips curve; Volcker disinflation (search for similar items in EconPapers)
JEL-codes: D84 E24 E31 E32 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2017-10-01
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 (8)

Downloads: (external link)
https://www.bostonfed.org/publications/research-de ... -phillips-curve.aspx Summary (text/html)
https://www.bostonfed.org/-/media/Documents/Workingpapers/PDF/2017/wp1711.pdf Full text (application/pdf)

Related works:
Journal Article: Inflation expectations and nonlinearities in the Phillips curve (2023)
Working Paper: Inflation Expectations and Nonlinearities in the Phillips Curve (2018)
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:fip:fedbwp:17-11

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Boston Contact information at EDIRC.
Bibliographic data for series maintained by Catherine Spozio ().