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Anchored Inflation Expectations and the Slope of the Phillips Curve

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  • Peter Jorgensen
  • Kevin J. Lansing

Abstract

We estimate a New Keynesian Phillips curve that allows for changes in the degree of anchoring of agents' subjective inflation forecasts. The estimated slope coefficient in U.S. data is stable over the period 1960 to 2019. Out-of-sample forecasts with the model resolve both the "missing disinflation puzzle" during the Great Recession and the "missing inflation puzzle" during the subsequent recovery. Using a simple New Keynesian model, we show that if agents solve a signal extraction problem to disentangle transitory versus permanent shocks to inflation, then an increase in the policy rule coefficient on inflation serves to endogenously anchor agents' inflation forecasts. Improved anchoring reduces the correlation between changes in inflation and the output gap, making the backward-looking Phillips curve appear flatter. But at the same time, improved anchoring increases the correlation between the level of inflation and the output gap, leading to a resurrection of the "original" Phillips curve. Both model predictions are consistent with U.S. data since the late 1990s.

Suggested Citation

  • Peter Jorgensen & Kevin J. Lansing, 2019. "Anchored Inflation Expectations and the Slope of the Phillips Curve," Working Paper Series 2019-27, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2019-27
    DOI: 10.24148/wp2019-27
    Note: "An earlier version of this paper was titled "Anchored Expectations and the Flatter Phillips Curve", published November 7, 2019.
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    Cited by:

    1. Faryna, Oleksandr & Pham, Tho & Talavera, Oleksandr & Tsapin, Andriy, 2022. "Wage and unemployment: Evidence from online job vacancy data," Journal of Comparative Economics, Elsevier, vol. 50(1), pages 52-70.
    2. Andrew B. Martinez, 2020. "Extracting Information from Different Expectations," Working Papers 2020-008, The George Washington University, Department of Economics, H. O. Stekler Research Program on Forecasting.
    3. Caglayan, Mustafa & Talavera, Oleksandr & Xiong, Lin, 2022. "Female small business owners in China: Discouraged, not discriminated," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    4. Lansing, Kevin J., 2021. "Endogenous forecast switching near the zero lower bound," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 153-169.
    5. Michael T. Kiley, 2024. "Anchored or Not: How Much Information Does 21st Century Data Contain on Inflation Dynamics?," International Journal of Central Banking, International Journal of Central Banking, vol. 20(1), pages 239-261, February.

    More about this item

    Keywords

    inflation expectations; Phillips curve; inflation puzzles; unobserved components time series model; consistent expectation equilibrium;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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