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Understanding the Flattening Phillips Curve

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 Department of Economics, Williams College in its series Department of Economics Working Papers with number 2008-15.

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Length: 33 pages
Date of creation: May 2008
Publication status: Forthcoming in the North American Journal of Economics and Finance.
Handle: RePEc:wil:wileco:2008-15
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