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Anchored Inflation Expectations and the Flatter Phillips Curve

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  • Peter Jorgensen
  • Kevin J. Lansing

Abstract

Conventional versions of the Phillips curve cannot account for inflation dynamics during and after the U.S. Great Recession, leading many to conclude that the Phillips curve relationship has weakened or even disappeared. We show that if agents solve a signal extraction problem to disentangle temporary versus permanent shocks to inflation, then agents? inflation expectations should have become more ?anchored? over the Great Moderation period. An estimated New Keynesian Phillips curve that accounts for the increased anchoring of expected inflation exhibits a stable slope coefficient over the period 1960 to 2019. Out-of-sample forecasts show that this model can account for the ?missing disinflation? during the U.S. Great Recession and the ?missing inflation? during the subsequent recovery. We use a simple three-equation New Keynesian model to show that an increase in the Taylor rule coefficient on inflation (or the output gap) serves to endogenously anchor agents? subjective inflation expectations and thereby ?flatten? the reduced-form Phillips curve.

Suggested Citation

  • Peter Jorgensen & Kevin J. Lansing, 2019. "Anchored Inflation Expectations and the Flatter Phillips Curve," Working Paper Series 2019-27, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfwp:2019-27
    DOI: 10.24148/wp2019-27
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    Cited by:

    1. Mustafa Caglayan & Oleksandr Talavera & Lin Xiong, 2020. "Female Small Business Owners in China: Discouraged, not Discriminated," Discussion Papers 20-04, Department of Economics, University of Birmingham.
    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. Lansing, Kevin J., 2021. "Endogenous forecast switching near the zero lower bound," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 153-169.

    More about this item

    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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