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The Intermittent Phillips Curve: Finding a Stable (But Persistence-Dependent) Phillips Curve Model Specification

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  • Richard Ashley
  • Randal Verbrugge

Abstract

We establish that the Phillips curve is persistence-dependent: inflation responds differently to persistent versus moderately persistent (or versus transient) fluctuations in the unemployment rate gap. This persistence-dependent relationship appears to align with business-cycle stages and is thus consistent with existing theory. Previous work fails to model this dependence, thereby finding numerous "inflation puzzles" – e.g., missing inflation/disinflation – noted in the literature. Our specification eliminates these puzzles; for example, the Phillips curve has not weakened, nor was inflation "stubbornly low" in 2019. The model's coefficients are stable, and it provides accurate conditional recursive forecasts through the Great Recession. There are important monetary policy implications.

Suggested Citation

  • Richard Ashley & Randal Verbrugge, 2019. "The Intermittent Phillips Curve: Finding a Stable (But Persistence-Dependent) Phillips Curve Model Specification," Working Papers 19-09R2, Federal Reserve Bank of Cleveland, revised 14 Feb 2023.
  • Handle: RePEc:fip:fedcwq:190900
    DOI: 10.26509/frbc-wp-201909r2
    Note: *First posted May 2019 and originally titled “Variation in the Phillips Curve Relation across Three Phases of the Business Cycle.”; Appendix - https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/publications/working-papers/2023/wp1909r2-app.pdf
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    Cited by:

    1. Daniel R. Carroll & Randal Verbrugge, 2019. "Behavior of a New Median PCE Measure: A Tale of Tails," Economic Commentary, Federal Reserve Bank of Cleveland, issue July.

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    More about this item

    Keywords

    NAIRU; persistence dependence; recession gap; overheating; Phillips curve;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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