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
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: Suggested Citation