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Convexity of the Phillips Curve and Difficulty of Monetary Policy to Fight against Inflation

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  • Séverine Menguy

    (Faculté Société et Humanité, Université Paris Cité, Paris, France)

Abstract

We propose a theoretical model that underlines the implications of a non-linear Phillips curve for the difficulty of monetary policy to fight against inflationary tensions similar to those encountered in 2021 and 2022 at a worldwide level, due to the resumption of demand after the COVID crisis and to the war in Ukraine. In such non-linearities, the interest rate becomes an asymmetric and convex function of an inflationary supply shock variation. In the case of inflationary tensions, the nominal interest rate can then strongly increase above its long-term equilibrium value. Economic recession is exacerbated, whereas inflationary tensions are more accentuated. Then, the risk is a more than proportional increase in public expenditure to compensate for the decrease in private consumption, which could not be achieved without a strong growth in the public indebtedness level.

Suggested Citation

  • Séverine Menguy, 2025. "Convexity of the Phillips Curve and Difficulty of Monetary Policy to Fight against Inflation," Journal of Economic Analysis, Anser Press, vol. 4(3), pages 90-110, September.
    • Handle: RePEc:bba:j00001:v:4:y:2025:i:3:p:90-110:d:436
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    References listed on IDEAS

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    1. Alberto Musso & Livio Stracca & Dick van Dijk, 2009. "Instability and Nonlinearity in the Euro-Area Phillips Curve," International Journal of Central Banking, International Journal of Central Banking, vol. 5(2), pages 181-212, June.
    2. Schaling, Eric, 2004. "The Nonlinear Phillips Curve and Inflation Forecast Targeting: Symmetric versus Asymmetric Monetary Policy Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 361-386, June.
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