Revisiting The Phillips Curve In The Euro Area Post-Pandemic

This chapter provides an estimate of a price Phillips curve in the euro area using labour market tightness as an alternative measure of economic slack. The Phillips curve is estimated in a panel framework, drawing on a newly constructed dataset of job vacancies for the euro area economies, and by accounting for inflation expectations and supply-side shocks. The empirical specification allows for potential nonlinearities in the inflation–slack relationship. The results point to some evidence of non-linearity in the slope of the Phillips curve. In particular, the findings suggest that these non-linearities at higher level of tightness, together with the stronger role of inflation expectations observed in the post-Covid period, may have contributed to the pronounced surge in inflation during that episode. Overall, the results reinforce the effectiveness of labour market tightness, relative to the conventional measures of slack, in understanding the post-pandemic inflation dynamics in the euro area. The study contributes to the ongoing debate on the Phillips curve, which has intensified after the Covid-19 pandemic amid heightened uncertainty about the stability of inflation–slack relationship.