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Inflation: mind the gap

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  • Zheng Liu
  • Glenn D. Rudebusch

Abstract

This Economic Letter examines recent evidence concerning the connection between unemployment and inflation. We argue that, in a deep economic downturn such as the current one, inflation and unemployment do tend to move together in a manner consistent with the Phillips curve. But, outside of such severe recessions, fluctuations in the inflation and unemployment rates do not line up particularly well. Inflation appears to be buffeted by many other factors. This explains why some studies find only a \\"loose empirical relationship\\" between economic slack and inflation. Thus, compared with the relatively tranquil period between the mid-1980s and the mid-2000s, evidence suggests that recent high unemployment rates are broadly consistent with the sizable decline in core inflation since the fourth quarter of 2007, a relationship that broadly fits the Phillips curve model.

Suggested Citation

  • Zheng Liu & Glenn D. Rudebusch, 2010. "Inflation: mind the gap," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan19.
    • Handle: RePEc:fip:fedfel:y:2010:i:jan19:n:2010-02
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    References listed on IDEAS

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    1. James H. Stock & Mark W. Watson, 2008. "Phillips curve inflation forecasts," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
    2. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters, in: Monetary Policy Rules, pages 203-262, National Bureau of Economic Research, Inc.
    3. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, July.
    4. Andrew Atkeson & Lee E. Ohanian, 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 25(Win), pages 2-11.
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    Cited by:

    1. Oguz Atuk & Cem Aysoy & Mustafa Utku Ozmen & Cagri Sarikaya, 2014. "Turkiye�de Enflasyonun Is Cevrimlerine Duyarliligi : Cikti Acigina Duyarli TUFE Alt Gruplarinin Saptanmasi," Working Papers 1437, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    2. Taeyoung Doh, 2011. "Is unemployment helpful in understanding inflation?," Economic Review, Federal Reserve Bank of Kansas City, vol. 96(Q IV), pages 5-26.
    3. Lillian Kamal, 2014. "Do GAP Models Still have a Role to Play in Forecasting Inflation?," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 8(3), pages 1-12.
    4. James H. Stock & Mark W. Watson, 2010. "Modeling inflation after the crisis," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 173-220.
    5. Faust, Jon & Wright, Jonathan H., 2013. "Forecasting Inflation," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 2-56, Elsevier.
    6. Sell, Friedrich L. & Reinisch, David C., 2013. "How do Beveridge and Phillips curves in the euro area behave under the stress of the world economic crisis?," Working Papers in Economics 2013,1, Bundeswehr University Munich, Economic Research Group.
    7. Fröhling, Annette & Lommatzsch, Kirsten, 2011. "Output sensitivity of inflation in the euro area: Indirect evidence from disaggregated consumer prices," Discussion Paper Series 1: Economic Studies 2011,25, Deutsche Bundesbank.
    8. Adam S. Posen, 2010. "The Central Banker's Case for Doing More," Policy Briefs PB10-24, Peterson Institute for International Economics.
    9. Jens H. E. Christensen, 2010. "TIPS and the risk of deflation," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct25.
    10. Anna Cororaton & Richard Peach & Robert W. Rich, 2011. "How does slack influence inflation?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 17(June).

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