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Why Has Inflation Been So Unresponsive to Economic Activity in Recent Years?

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  • Robert G. Murphy

    (Boston College)

Abstract

Standard Phillips curve models relating price inflation to measures of slack in the economy suggest that the United States should have experienced an episode of deflation during the Great Recession and the subsequent sluggish recovery. But although inflation reached very low levels, prices continued to rise rather than fall. More recently, many observers have argued that inflation should have increased as the unemployment rate declined and labor markets tightened, but inflation has remained below the Federal Reserve’s policy target. This paper confirms that the slope of the Phillips curve has decreased over recent decades and is very close to zero today. I modify the Phillips curve to allow its slope to vary continuously through time drawing on theories of price-setting behavior when prices are costly to adjust and when information is costly to obtain. I find that adapting the Phillips curve to allow for time-variation in its slope helps explain inflation before, during, and after the Great Recession.

Suggested Citation

  • Robert G. Murphy, 2016. "Why Has Inflation Been So Unresponsive to Economic Activity in Recent Years?," Boston College Working Papers in Economics 920, Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:920
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Inflation; Phillips curve; Great Recession;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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