How Curvy is the Phillips Curve?

Philip Bunn, Lena Anayi, Emily Barnes, Nicholas Bloom, Aaron Jalca, Paul Mizen, Gregory Thwaites and Ivan Yotzov

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

Abstract: Macro evidence suggests a convex relationship between inflation and slack, but causal identification is challenging. Using large firm-panel surveys in the UK and US, we show that price responses to demand shocks are convex at the firm level, across hypothetical survey shocks, realised sales shocks, and COVID-induced demand shocks. Convexity is strongest when firms and industries face higher inflation, fades beyond two years, and applies to cost shocks. We rationalise these findings with a menu-cost model in which trend inflation moves firms closer to price-increase thresholds. We estimate that this nonlinearity explains about one quarter of the 2022 inflation overshoot.

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
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Working Paper: How curvy is the Phillips curve? (2025)
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