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The hockey stick Phillips curve and the zero lower bound

Gregor Böhl and Philipp Lieberknecht

No 153, IMFS Working Paper Series from Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)

Abstract: The recently observed disconnect between inflation and economic activity can be explained by the interplay between the zero lower bound (ZLB) and the costs of external financing. In normal times, credit spreads and the nominal interest rate balance out; factor costs dominate firms' marginal costs. When nominal rates are constrained, larger spreads can more than offset the effect of lower factor costs and induce only moderate inflation responses. The Phillips curve is hence flat at the ZLB, but features a positive slope in normal times and thus a hockey stick shape. Via this mechanism, forward guidance may induce deflationary effects.

Keywords: Phillips Curve; Financial Frictions; Zero Lower Bound; Disinflation; Forward Guidance (search for similar items in EconPapers)
JEL-codes: C62 C63 E31 E32 E44 E52 E58 E63 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cwa, nep-mac and nep-mon
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