The Phillips curve – history of thought and empirical evidence

The Phillips curve is one of the best known, most discussed and most often used macroeconomic relationships. As a result of the severe, prolonged global recession that unfolded in the wake of the 2007–2008 financial crisis, special attention was paid to the issue of the slope of the curve. In spite of the protracted recession, the decline in inflation remained moderate, and although it reached a much lower level than before, permanent deflation did not occur. According to most of the empirical studies, flattening of the Phillips curve was observed in the past decades, i.e. the coefficient of the output gap declined significantly. Although this process started prior to the crisis, the crisis amplified it considerably. The main underlying reasons for these developments are attributable to changes in corporate pricing behaviour and to the process of globalisation, as well as to the fact that downward nominal wage rigidities made the Phillips curve even flatter in the low inflation environment following the crisis.