The Shifting and Steepening of Phillips Curves During the Pandemic Recovery: International Evidence and Some Theory

Tryggvi Gudmundsson, Chris Jackson and Rafael Portillo

No 2024/007, IMF Working Papers from International Monetary Fund

Abstract: We study the global inflation surge during the pandemic recovery and the implications for aggregate and sectoral Phillips curves. We provide evidence that Phillips curves shifted up and steepened across advanced economies, and that differences in the inflation response across sectors imply the relative price of goods has been pro-cyclical this time around rather than a-cyclical as during previous cycles. We show analytically that these three features emerge endogenously in a two-sector new-Keynesian model when we introduce unbalanced recoveries that run against a supply constraint in the goods sector. A calibrated exercise shows that the resulting changes to the output-inflation relation are quantitatively important and improve the model's ability to replicate the inflation surge during this period.

Keywords: Inflation; Phillips Curves; COVID-19; inflation surge; output-inflation relation; sectoral Phillips curves; inflation response; goods price; Output gap; Business cycles; Economic recession; Global (search for similar items in EconPapers)
Pages: 49
Date: 2024-01-12
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