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The Phillips Curve at the ECB

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  • Fabian Eser
  • Peter Karadi
  • Philip R. Lane
  • Laura Moretti
  • Chiara Osbat

Abstract

We explain the role of the Phillips Curve in the analysis of the economic outlook and the formulation of monetary policy at the ECB. First, revisiting the structural Phillips Curve, we highlight the challenges in recovering structural parameters from reduced‐form estimates and relate the reduced‐form Phillips Curve to the (semi‐)structural models used at the ECB. Second, we identify the slope of the structural Phillips Curve by exploiting cross‐country variation and using high‐frequency monetary policy surprises as instruments. Third, we present reduced‐form evidence, focusing on the relation between slack and inflation and the role of inflation expectations. In relation to the recent weakness of inflation, we discuss the role of firm profits in the pass‐through from wages to prices and the contribution of external factors. Overall, the available evidence supports the view that the absorption of slack and a firm anchoring of inflation expectations remain central to successful inflation stabilization.

Suggested Citation

  • Fabian Eser & Peter Karadi & Philip R. Lane & Laura Moretti & Chiara Osbat, 2020. "The Phillips Curve at the ECB," Manchester School, University of Manchester, vol. 88(S1), pages 50-85, September.
  • Handle: RePEc:bla:manchs:v:88:y:2020:i:s1:p:50-85
    DOI: 10.1111/manc.12339
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    12. Álvarez, Luis J. & Correa-López, Mónica, 2020. "Inflation expectations in euro area Phillips curves," Economics Letters, Elsevier, vol. 195(C).
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    14. Bańbura, Marta & Bobeica, Elena, 2020. "Does the Phillips curve help to forecast euro area inflation?," Working Paper Series 2471, European Central Bank.
    15. Brand, Claus & Obstbaum, Meri & Coenen, Günter & Sondermann, David & Lydon, Reamonn & Ajevskis, Viktors & Hammermann, Felix & Angino, Siria & Hernborg, Nils & Basso, Henrique & Hertweck, Matthias & Bi, 2021. "Employment and the conduct of monetary policy in the euro area," Occasional Paper Series 275, European Central Bank.
    16. Fontanari, Claudia & Palumbo, Antonella & Salvatori, Chiara, 2022. "The updated Okun method for estimation of potential output with alternative measures of labor underutilization," Structural Change and Economic Dynamics, Elsevier, vol. 60(C), pages 158-178.
    17. Tsz H. Hung & Yum K. Kwan, 2022. "Hong Kong's New Keynesian Phillips Curve: Sticky information or sticky price?," Pacific Economic Review, Wiley Blackwell, vol. 27(1), pages 42-55, February.
    18. Ondřej Bednář & Andrea Čečrdlová & Božena Kadeřábková & Pavel Řežábek, 2022. "Energy Prices Impact on Inflationary Spiral," Energies, MDPI, vol. 15(9), pages 1-25, May.
    19. Oinonen, Sami & Vilmi, Lauri, 2021. "Analysing euro area inflation outlook with the Phillips curve," BoF Economics Review 5/2021, Bank of Finland.
    20. Dovì, Max-Sebastian & Koester, Gerrit & Nickel, Christiane, 2021. "Addressing the endogeneity of slack in Phillips Curves," Working Paper Series 2619, European Central Bank.
    21. Andrejs Zlobins, 2021. "On the Time-varying Effects of the ECB's Asset Purchases," Working Papers 2021/02, Latvijas Banka.
    22. Koester, Gerrit & Lis, Eliza & Nickel, Christiane & Osbat, Chiara & Smets, Frank, 2021. "Understanding low inflation in the euro area from 2013 to 2019: cyclical and structural drivers," Occasional Paper Series 280, European Central Bank.
    23. Andrejs Zlobins, 2020. "ZLB and Beyond: Real and Financial Effects of Low and Negative Interest Rates in the Euro Area," Working Papers 2020/06, Latvijas Banka.
    24. Kouvavas, Omiros & Osbat, Chiara & Reinelt, Timo & Vansteenkiste, Isabel, 2021. "Markups and inflation cyclicality in the euro area," Working Paper Series 2617, European Central Bank.

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    7. Philippe Goulet Coulombe, 2022. "A Neural Phillips Curve and a Deep Output Gap," Papers 2202.04146, arXiv.org.
    8. Rostagno, Massimo & Altavilla, Carlo & Carboni, Giacomo & Lemke, Wolfgang & Motto, Roberto & Saint Guilhem, Arthur & Yiangou, Jonathan, 2019. "A tale of two decades: the ECB’s monetary policy at 20," Working Paper Series 2346, European Central Bank.
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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