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Insights from OECD Phillips curve equations on recent inflation outcomes

Author

Listed:
  • David Turner
  • Thomas Chalaux
  • Yvan Guillemette
  • Elena Rusticelli

Abstract

A statistically significant relationship between the unemployment gap and inflation can be found for a clear majority of OECD countries, but the magnitude of the effect is typically weak. A corollary is that the effect of labour market slack on inflation can often be dominated by other shocks, including imported inflation. The current Secretariat Phillips curve specification assumes inflation expectations are anchored at the central bank’s target, although some experimentation suggests that alternative proxies for expectations sometimes work better and there is some evidence that persistent under-shooting of inflation has led to some de-anchoring of expectations from the target, especially in the euro area. For most OECD countries, a measure of the global output gap is both statistically significant and strongly preferred to a domestic gap measure in explaining the wedge between headline and core inflation, although domestic gaps are strongly preferred in explaining core inflation. Various forms of non-linearity in the Phillips curve provide possible explanations for recent weak inflation outcomes, but statistical testing provides only limited support for such explanations.

Suggested Citation

  • David Turner & Thomas Chalaux & Yvan Guillemette & Elena Rusticelli, 2019. "Insights from OECD Phillips curve equations on recent inflation outcomes," OECD Economics Department Working Papers 1579, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:1579-en
    DOI: 10.1787/d1e97b18-en
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    File URL: https://doi.org/10.1787/d1e97b18-en
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    More about this item

    Keywords

    anchored expectations; global output gap; inflation expectations; Phillips curve;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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