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Understanding the Flattening Phillips Curve

  • Ken Kuttner

    (Williams College)

  • Tim Robinson

    (Reserve Bank of Australia)

Policy-makers have recently noted an apparent flattening of the Phillips curve. The implications of such a change include that a positive output gap would be less inflationary, but the cost of reducing inflation, once established, would increase. This paper’s objective is to review the evidence and possible explanations for the flattening of the Phillips curve in the context of new-Keynesian economic theory. Using data for the United States and Australia, we find that the flattening is evident in the baseline ‘structural’ new-Keynesian Phillips curve. We consider a variety of reasons for this structural flattening, such as data problems, globalisation and alternative definitions of marginal cost, none of which is entirely satisfactory.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2008-05.

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Date of creation: Oct 2008
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Handle: RePEc:rba:rbardp:rdp2008-05
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