How Curvy is the Phillips Curve?

Philip Bunn, Lena Anayi, Nicholas Bloom, Paul Mizen, Gregory Thwaites and Ivan Yotzov

No 33234, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Macro data suggests a convex relationship between inflation and economic slack, but identifying causality is challenging. Using micro data from large panel surveys of UK and US firms we show that the response of prices to demand shocks is also convex at the firm level. We obtain similar results using three different empirical exercises examining: the impact of COVID demand shocks, the response to sales shocks, and hypothetical shocks from a survey question. This convexity is strongest in firms and industries with higher inflation, disappears in horizons beyond two years, and is also present in response to cost shocks. We rationalize these findings in a menu cost model with positive trend inflation and decreasing returns at the firm level, which replicates firm and aggregate Phillips curve convexity. The non-linearity emerges from trend inflation pushing firms closer to their price increase thresholds.

JEL-codes: C83 D22 D84 E31 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-mac
Note: ME
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Working Paper: How curvy is the Phillips curve? (2025)
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