The Concave Phillips Curve

Narayana Kocherlakota

No 32528, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper derives the curvature properties of the short-run Phillips curve for a wide class of models with time-dependent pricing frictions. Contrary to conventional thinking, the Phillips curve is asymptotically horizontal for high levels of economic activity and asymptotically vertical for low levels of economic activity. Moreover, it is globally concave under relatively weak conditions that allow real marginal cost to be an unbounded convex function of economic activity. Intuitively, when economic activity is very high (low), substitution effects within the price index imply that inflation behaves as if prices are nearly fully sticky (flexible). Using (conventional) measures of inflation that understate the relevant substitution effects may lead to misleading conclusions about the curvature of the Phillips curve, and to corresponding errors in the formulation of monetary policy.

JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-cba and nep-mon
Note: ME
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