The Intermittent Phillips Curve: Finding a Stable (But Persistence-Dependent) Phillips Curve Model Specification

37 Pages Posted: 28 May 2019 Last revised: 14 Feb 2023

See all articles by Richard A. Ashley

Richard A. Ashley

Virginia Tech. - Department of Economics

Randal Verbrugge

Federal Reserve Bank of Cleveland

Date Written: February 14, 2023

Abstract

We establish that the Phillips curve is persistence-dependent: inflation responds differently to persistent versus moderately persistent (or versus transient) fluctuations in the unemployment rate gap. This persistence-dependent relationship appears to align with business-cycle stages and is thus consistent with existing theory. Previous work fails to model this dependence, thereby finding numerous "inflation puzzles" – e.g., missing inflation/disinflation – noted in the literature. Our specification eliminates these puzzles; for example, the Phillips curve has not weakened, nor was inflation "stubbornly low" in 2019. The model's coefficients are stable, and it provides accurate conditional recursive forecasts through the Great Recession. There are important monetary policy implications.

Keywords: overheating; recession gap; persistence dependence; NAIRU, Phillips Curve

JEL Classification: E00, E31, C22, C32, E5, E32

Suggested Citation

Ashley, Richard A. and Verbrugge, Randal, The Intermittent Phillips Curve: Finding a Stable (But Persistence-Dependent) Phillips Curve Model Specification (February 14, 2023). FRB of Cleveland Working Paper No. 19-09R2, Available at SSRN: https://ssrn.com/abstract=3393943

Richard A. Ashley

Virginia Tech. - Department of Economics ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

Randal Verbrugge (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
79
Abstract Views
510
Rank
555,299
PlumX Metrics