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The Flattening of the Phillips Curve: Policy Implications Depend on the Cause

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  • Filippo Occhino

Abstract

According to the historical relationship known as the Phillips curve, strengthening of the economy is commonly associated with increasing inflation. With inflation having only modestly picked up in the past few years as the economy has become more robust, many believe the Phillips curve relationship has weakened, with the curve becoming flatter. I show that the flattening can be due to very different types of structural changes and that knowing the type of change that has occurred is crucial for choosing the appropriate monetary policy.

Suggested Citation

  • Filippo Occhino, 2019. "The Flattening of the Phillips Curve: Policy Implications Depend on the Cause," Economic Commentary, Federal Reserve Bank of Cleveland, issue July.
  • Handle: RePEc:fip:fedcec:00103
    DOI: 10.26509/frbc-ec-201911
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    File URL: https://doi.org/10.26509/frbc-ec-201911
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    References listed on IDEAS

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    1. John M. Roberts, 2006. "Monetary Policy and Inflation Dynamics," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
    2. Troy Davig, 2016. "Phillips Curve Instability and Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 233-246, February.
    3. Charles T. Carlstrom & Timothy S. Fuerst & Matthias Paustian, 2009. "Inflation Persistence, Monetary Policy, and the Great Moderation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 767-786, June.
    4. Frederic S. Mishkin, 2007. "Inflation Dynamics," International Finance, Wiley Blackwell, vol. 10(3), pages 317-334, December.
    5. Robert Shackleton, 2018. "Estimating and Projecting Potential Output Using CBO’s Forecasting Growth Model: Working Paper 2018-03," Working Papers 53558, Congressional Budget Office.
    6. Dora M Iakova, 2007. "Flattening of the Phillips Curve; Implications for Monetary Policy," IMF Working Papers 07/76, International Monetary Fund.
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    Cited by:

    1. Richard A. Ashley & Randall J. Verbrugge., 2006. "Mis-Specification in Phillips Curve Regressions: Quantifying Frequency Dependence in This Relationship While Allowing for Feedback," Working Papers e06-11, Virginia Polytechnic Institute and State University, Department of Economics.

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