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Explaining inflation in the aftermath of the Great Recession

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  • Murphy, Robert G.

Abstract

This paper considers whether the Phillips curve can explain the recent behavior of inflation in the United States. Standard formulations of the model predict that the ongoing large shortfall in economic activity relative to full employment should have led to deflation over the past several years. I confirm previous findings that the slope of the Phillips curve has varied over time and probably is lower today than it was several decades ago. This implies that estimates using historical data will overstate the responsiveness of inflation to present-day economic conditions. I modify the traditional Phillips curve to explicitly account for time variation in its slope and show how this modified model can explain the recent behavior of inflation without relying on anchored expectations. Specifically, I explore reasons why the slope might vary over time, focusing on implications of the sticky-price and sticky-information approaches to price adjustment. These implications suggest that the inflation environment and uncertainty about regional economic conditions should influence the slope of the Phillips curve. I introduce proxies to account for these effects and find that a Phillips curve modified to allow its slope to vary with uncertainty about regional economic conditions can best explain the recent path of inflation.

Suggested Citation

  • Murphy, Robert G., 2014. "Explaining inflation in the aftermath of the Great Recession," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 228-244.
  • Handle: RePEc:eee:jmacro:v:40:y:2014:i:c:p:228-244
    DOI: 10.1016/j.jmacro.2014.01.002
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    References listed on IDEAS

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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Potpourri
      by Bob Murphy in Free Advice on 2017-06-30 20:56:01

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    Cited by:

    1. Laurence Ball & Sandeep Mazumder, 2014. "A Phillips Curve with Anchored Expectations and Short-Term Unemployment," NBER Working Papers 20715, National Bureau of Economic Research, Inc.
    2. repec:pal:easeco:v:44:y:2018:i:1:d:10.1057_eej.2015.50 is not listed on IDEAS
    3. Michael Ehrmann, 2015. "Targeting Inflation from Below: How Do Inflation Expectations Behave?," International Journal of Central Banking, International Journal of Central Banking, vol. 11(4), pages 213-249, September.
    4. Juan Carlos Berganza & Pedro del Río & Fructuoso Borrallo, 2016. "Determinants and implications of low global inflation rates," Occasional Papers 1608, Banco de España;Occasional Papers Homepage.
    5. Friedrich, Christian, 2016. "Global inflation dynamics in the post-crisis period: What explains the puzzles?," Economics Letters, Elsevier, vol. 142(C), pages 31-34.
    6. Robert G. Murphy & Adam Rohde, 2014. "Rational Bias in Inflation Expectations," Boston College Working Papers in Economics 857, Boston College Department of Economics, revised 25 Oct 2015.
    7. 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.
    8. Robert Murphy, 2016. "Explaining the Recent Behavior of Inflation in the United States," EcoMod2016 9550, EcoMod.

    More about this item

    Keywords

    Inflation; Phillips curve; Great Recession; Sticky information; Sticky prices;

    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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