Inflation Expectations and Nonlinearities in the Phillips Curve

Alexander Doser, Ricardo Nunes, Nikhil Rao and Viacheslav Sheremirov
Additional contact information
Alexander Doser: Northwestern University
Nikhil Rao: University of Michigan

No 1018, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: This paper examines the role of inflation expectations and nonlinearities in the Phillips curve. We find that nonlinearities per se can address the missing disinflation. The estimated model favors two regions, with a flatter slope of the Phillips curve when unemployment is already high. This can explain why during the Great Recession inflation did not decrease as much as predicted by linear models. We also find that consumer expectations can explain the missing disinflation and prove to be a more robust feature of the Phillips curve. Namely, consumer expectations are also key in addressing the Great Inflation in the 1970s and the Volcker disinflation in the 1980s, periods in which nonlinearities have difficulty fitting the data. Our results suggest that both nonlinearities and consumer expectations should be examined jointly and that the latter is a more prevalent feature of the Phillips curve.

JEL-codes: D84 E24 E31 E32 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2018-08
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (9)

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https://repec.som.surrey.ac.uk/2018/DP10-18.pdf (application/pdf)

Related works:
Journal Article: Inflation expectations and nonlinearities in the Phillips curve (2023)
Working Paper: Inflation expectations and nonlinearities in the Phillips curve (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:1018

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