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The Long-Run Phillips Curve is ... a Curve

Author

Listed:
  • Guido Ascari
  • Paolo Bonomolo
  • Qazi Haque

Abstract

In U.S. data, inflation and output are negatively related in the long run. A Bayesian VAR with stochastic trends generalized to be piecewise linear provides robust reduced-form evidence in favor of a threshold level of trend inflation of around 4%, below which potential output is independent of trend inflation, and above which, instead, potential output is negatively affected by trend inflation. Moreover, this negative relationship is quite substantial: above the threshold every percentage point increase in trend inflation is related to about 1% decrease in potential output per year. A New Keynesian model generalized to admittime-varying trend inflation and estimated via particle filtering provides theoretical foundations to this reduced-form evidence. The structural long-run Phillips Curve implied by the estimated New Keynesian model is not statistically different from the one implied by the reduced-form piecewise linear BVAR model.

Suggested Citation

  • Guido Ascari & Paolo Bonomolo & Qazi Haque, 2023. "The Long-Run Phillips Curve is ... a Curve," CAMA Working Papers 2023-37, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2023-37
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    File URL: https://crawford.anu.edu.au/sites/default/files/2025-01/37_2023_ascari_bonomolo_haque.pdf
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    Cited by:

    1. Anis Foresto & Monique Reid & Jeffrey Rakgalakane, 2025. "State dependence of the Phillips curve what does this mean for monetary policy," Working Papers 11080, South African Reserve Bank.
    2. Andrea Renzetti, 2023. "Theory coherent shrinkage of Time-Varying Parameters in VARs," Papers 2311.11858, arXiv.org, revised Nov 2024.
    3. Gibbs, Christopher G. & Xin, Herbert W., 2024. "The sacrifice ratio and active fiscal policy," Economics Letters, Elsevier, vol. 245(C).

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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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