(Re-)Connecting Inflation and the Labor Market: A Tale of Two Curves

Hie Joo Ahn and Jeremy B. Rudd
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Hie Joo Ahn: https://www.federalreserve.gov/econres/hie-joo-ahn.htm
Jeremy B. Rudd: https://www.federalreserve.gov/econres/jeremy-rudd.htm

No 2024-050r1, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We propose an empirical framework in which shocks to worker reallocation, aggregate activity, and labor supply drive the joint dynamics of the labor market and inflation, and where reallocation shocks take two forms depending on whether they result from quits or from job losses. We find that these structural shocks, which affect the Beveridge curve, have different effects on inflation. Our model fully decomposes shifts of or along the empirical Beveridge curve in terms of the contribution of each shock and also allows us to estimate the Phillips correlation associated with each shock; observed Beveridge and Phillips correlations change over time depending on what types of structural shocks predominate in a given period. We find that reallocation shocks that accompany job losses were a key source of labor market dynamics and the steepening of the reduced-form Phillips curve during the Covid-19 pandemic, and were an important driver of the post-pandemic "soft landing."

Keywords: Beveridge curve; Phillips curve; Monetary policy (search for similar items in EconPapers)
JEL-codes: C11 C32 E24 E31 E52 (search for similar items in EconPapers)
Pages: 25 p.
Date: 2024-07-11, Revised 2025-05-28
Note: Revision
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2024-50

DOI: 10.17016/FEDS.2024.050r1

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