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Low Inflation Bends the Phillips Curve

Author

Listed:
  • Joseph E. Gagnon

    () (Peterson Institute for International Economics)

  • Christopher G. Collins

    () (Peterson Institute for International Economics)

Abstract

The Phillips curve, which traces out a negative relationship between inflation and unemployment, has undergone tremendous changes over more than 100 years. Some researchers argue that the slope of the curve in the United States fell substantially around 20 years ago so that unemployment now has little or no effect on inflation. This paper shows that another hypothesis is equally consistent with the data: The Phillips curve may be nonlinear when inflation is low, with the economy having operated in the flat region of the curve for most of the past 20 years. The next few years may be decisive in the debate between these hypotheses, as unemployment has returned to a range in which a nonlinear curve ought to display significant steepness. A flat Phillips curve implies little change in inflation going forward, but a nonlinear curve implies moderate increases in inflation over the next few years.

Suggested Citation

  • Joseph E. Gagnon & Christopher G. Collins, 2019. "Low Inflation Bends the Phillips Curve," Working Paper Series WP19-6, Peterson Institute for International Economics.
  • Handle: RePEc:iie:wpaper:wp19-6
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    File URL: https://piie.com/publications/working-papers/low-inflation-bends-phillips-curve
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    Cited by:

    1. Lindé, Jesper & Trabandt, Mathias, 2019. "Resolving the Missing Deflation Puzzle," CEPR Discussion Papers 13690, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Non-accelerating inflation rate of unemployment (NAIRU); unemployment rate;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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