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Inflation Expectations and Nonlinearities in the Phillips Curve

Author

Listed:
  • Alexander Doser

    (Northwestern University)

  • Ricardo Nunes

    (University of Surrey and CIMS)

  • Nikhil Rao

    (University of Michigan)

  • Viacheslav Sheremirov

    (Boston Fed)

Abstract

This paper examines the role of inflation expectations and nonlinearities in the Phillips curve. We find that nonlinearities per se can address the missing disinflation. The estimated model favors two regions, with a flatter slope of the Phillips curve when unemployment is already high. This can explain why during the Great Recession inflation did not decrease as much as predicted by linear models. We also find that consumer expectations can explain the missing disinflation and prove to be a more robust feature of the Phillips curve. Namely, consumer expectations are also key in addressing the Great Inflation in the 1970s and the Volcker disinflation in the 1980s, periods in which nonlinearities have difficulty fitting the data. Our results suggest that both nonlinearities and consumer expectations should be examined jointly and that the latter is a more prevalent feature of the Phillips curve.

Suggested Citation

  • Alexander Doser & Ricardo Nunes & Nikhil Rao & Viacheslav Sheremirov, 2018. "Inflation Expectations and Nonlinearities in the Phillips Curve," School of Economics Discussion Papers 1018, School of Economics, University of Surrey.
  • Handle: RePEc:sur:surrec:1018
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    File URL: https://repec.som.surrey.ac.uk/2018/DP10-18.pdf
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    References listed on IDEAS

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    Cited by:

    1. Luís Aguiar-Conraria & Manuel M. F. Martins & Maria Joana Soares, 2019. "The Phillips Curve at 60: time for time and frequency," NIPE Working Papers 04/2019, NIPE - Universidade do Minho.
    2. Sitikantha Pattanaik & Silu Muduli & Soumyajit Ray, 2020. "Inflation expectations of households: do they influence wage-price dynamics in India?," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 13(3), pages 244-263, September.
    3. Lazopoulos, Ioannis & Gabriel, Vasco, 2019. "Policy mandates and institutional architecture," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 122-134.
    4. Peter Hooper & Frederic S. Mishkin & Amir Sufi, 2019. "Prospects for Inflation in a High Pressure Economy: Is the Phillips Curve Dead or is It Just Hibernating?," NBER Working Papers 25792, National Bureau of Economic Research, Inc.
    5. Hooper, Peter & Mishkin, Frederic S. & Sufi, Amir, 2020. "Prospects for inflation in a high pressure economy: Is the Phillips curve dead or is it just hibernating?," Research in Economics, Elsevier, vol. 74(1), pages 26-62.
    6. Lindé, Jesper & Trabandt, Mathias, 2019. "Resolving the Missing Deflation Puzzle," CEPR Discussion Papers 13690, C.E.P.R. Discussion Papers.
    7. Luengo-Prado, María José & Rao, Nikhil & Sheremirov, Viacheslav, 2018. "Sectoral inflation and the Phillips curve: What has changed since the Great Recession?," Economics Letters, Elsevier, vol. 172(C), pages 63-68.
    8. Anat Bracha & Jenny Tang, 2019. "Inflation Thresholds and Inattention," Working Papers 19-14, Federal Reserve Bank of Boston.

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    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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