Non-Linear Phillips Curves with Inflation Regime-Switching

56 Pages Posted: 26 Sep 2016

See all articles by Jeremy Nalewaik

Jeremy Nalewaik

Board of Governors of the Federal Reserve System

Date Written: 2016-08

Abstract

Building on the results in Nalewaik (FEDS 2015-93), this work models wage growth and core PCE price inflation as regime-switching processes, whose characteristics in the 1970s, 1980s and early 1990s differ fundamentally from their characteristics in the 1960s and from the mid-1990s to present. The key innovation here is the addition to the models of fundamental driving variables like labor-market slack, and the evidence strongly suggests a non-linear effect of slack on wage growth and core PCE price inflation that becomes much larger after labor markets tighten beyond a certain point. The results are informative for assessing the likelihood and risks of meeting certain inflation targets on a sustained basis.

Keywords: Markov-switching, NAIRU, Threshold regression, Wage Inflation, Core PCE prices

JEL Classification: E31, E37, E51, E58, C22

Suggested Citation

Nalewaik, Jeremy John, Non-Linear Phillips Curves with Inflation Regime-Switching (2016-08). FEDS Working Paper No. 2016-078. Available at SSRN: https://ssrn.com/abstract=2842938 or http://dx.doi.org/10.17016/FEDS.2016.078

Jeremy John Nalewaik (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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