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Which Nonlinearity in the Phillips Curve? The Absence of Accelerating Deflation in Japan

  • Emmanuel De Veirman

It is standard to model the output-inflation trade-off as a linear relationship with a time-invariant slope. We assess empirical evidence for three types of nonlinearity in the short-run Phillips curve. At an empirical level, we aim to discover why large negative output gaps in Japan during the period 1998-2002 did not lead to accelerating deflation, but instead coincided with stable, be it moderately negative inflation. We document that this episode is most convincingly interpreted as reflecting a gradual flattening of the Phillips curve. The broader relevance of our analysis lies in its attempt to shed light on the determinants of such time-variation in the Phillips curve slope. Our results suggest that, in any economy where trend inflation is substantially lower (or substantially higher) today than in past decades, time-variation in the slope of the short-run Phillips curve has become too important to ignore.

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Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 536.

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Date of creation: Jan 2007
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Handle: RePEc:jhu:papers:536
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