Beveridgean Phillips Curve

This paper develops a Beveridgean model of the Phillips curve. While the New Keynesian Phillips curve is based on monopolistic pricing under price-adjustment costs, the Beveridgean Phillips curve is based on directed-search pricing under price-adjustment costs. Under directed search, prices respond to slack instead of marginal costs. The resulting Phillips curve has three properties that match recent US evidence. First, it delivers the divine coincidence: inflation is on target whenever unemployment is at its efficient level---the full-employment rate of unemployment (FERU), the geometric mean of the unemployment and vacancy rates. Second, it is decreasing and convex in the unemployment-inflation plane: inflation responds more strongly to unemployment when the labor market is inefficiently tight than when it is inefficiently slack. The convexity is inherited from the Beveridge curve, which makes unemployment a decreasing and convex function of tightness. Third, shifts of the Beveridge curve move the FERU and therefore shift the unemployment-inflation Phillips curve. The model also implies that the Fed's dual mandate is internally consistent, that a soft landing from an inefficiently tight labor market is possible, and that the zero lower bound is not topsy-turvy.