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Did the Federal Reserve Break the Phillips Curve? Theory and Evidence of Anchoring Inflation Expectations

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Abstract

In a macroeconomic model with drifting long-run inflation expectations, the anchoring of inflation expectations manifests in two testable predictions. First, expectations about inflation far in the future should no longer respond to news about current inflation. Second, better-anchored inflation expectations weaken the relationship between unemployment and inflation, flattening the reduced-form Phillips curve. We evaluate both predictions and find that communication of a numerical inflation objective better anchored inflation expectations in the United States but failed to anchor expectations in Japan. Moreover, the improved anchoring of U.S. inflation expectations can account for much of the observed flattening of the Phillips curve. Finally, we present evidence that initial Federal Reserve communication around its longer-run inflation objective may have led inflation expectations to anchor at a level below 2 percent.

Suggested Citation

  • Brent Bundick & Andrew Lee Smith, 2020. "Did the Federal Reserve Break the Phillips Curve? Theory and Evidence of Anchoring Inflation Expectations," Research Working Paper RWP 20-11, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:88701
    DOI: 10.18651/RWP2020-11
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    Cited by:

    1. Manuel M. F. Martins & Fabio Verona, 2021. "Inflation Dynamics and Forecast: Frequency Matters," CEF.UP Working Papers 2101, Universidade do Porto, Faculdade de Economia do Porto.
    2. Malmendier, Ulrike M. & Nagel, Stefan, 2026. "Seemingly Anchored Inflation Expectations," CEPR Discussion Papers 21632, Centre for Economic Policy Research.
    3. Anna Lipinska & Enrique Martínez García & Felipe Schwartzman, 2025. "Pandemic and War Inflation: Lessons from the International Experience," Working Papers 2534, Federal Reserve Bank of Dallas.
    4. Tatsushi Okuda & Tomohiro Tsuruga & Francesco Zanetti, 2021. "Imperfect Information, Heterogeneous Demand Shocks,and Inflation Dynamics," Economics Series Working Papers 934, University of Oxford, Department of Economics.
    5. Hany Guirguis & Vaneesha Boney Dutra & Zoe McGreevy, 2022. "The impact of global economies on US inflation: A test of the Phillips curve," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(3), pages 575-592, July.
    6. Yilmazkuday, Hakan, 2026. "Expected versus unexpected Inflation:The role of Trade Policy," The North American Journal of Economics and Finance, Elsevier, vol. 82(C).
    7. repec:upd:utmpwp:030 is not listed on IDEAS
    8. Czudaj, Robert L., 2023. "Expectation Formation and the Phillips Curve Revisited," MPRA Paper 119478, University Library of Munich, Germany.
    9. Taisuke Nakata & Yoshiyuki Nakazono & Kento Tango, 2026. "Daily Inflation Expectations in Japan around the Time of Regime Change," CARF F-Series CARF-F-624, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    10. Hie Joo Ahn & Leland E. Farmer, 2024. "Disagreement About the Term Structure of Inflation Expectations," Finance and Economics Discussion Series 2024-084, Board of Governors of the Federal Reserve System (U.S.).

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    JEL classification:

    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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