Anchored Inflation Expectations and the Slope of the Phillips Curve

Peter Jorgensen and Kevin Lansing

No 2019-27, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We estimate a New Keynesian Phillips curve that allows for changes in the degree of anchoring of agents' subjective inflation forecasts. The estimated slope coefficient in U.S. data is stable over the period 1960 to 2019. Out-of-sample forecasts with the model resolve both the "missing disinflation puzzle" during the Great Recession and the "missing inflation puzzle" during the subsequent recovery. Using a simple New Keynesian model, we show that if agents solve a signal extraction problem to disentangle transitory versus permanent shocks to inflation, then an increase in the policy rule coefficient on inflation serves to endogenously anchor agents' inflation forecasts. Improved anchoring reduces the correlation between changes in inflation and the output gap, making the backward-looking Phillips curve appear flatter. But at the same time, improved anchoring increases the correlation between the level of inflation and the output gap, leading to a resurrection of the "original" Phillips curve. Both model predictions are consistent with U.S. data since the late 1990s.

Keywords: inflation expectations; Phillips curve; inflation puzzles; unobserved components time series model; consistent expectation equilibrium (search for similar items in EconPapers)
JEL-codes: E31 E37 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2019-11-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: "An earlier version of this paper was titled "Anchored Expectations and the Flatter Phillips Curve", published November 7, 2019.
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2019-27

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DOI: 10.24148/wp2019-27

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