Finding a Stable Phillips Curve Relationship: A Persistence-Dependent Regression Model
60 Pages Posted: 28 May 2019 Last revised: 18 May 2020
Date Written: April 8, 2020
We establish that the Phillips curve is persistence-dependent: inflation responds differently to persistent versus moderately persistent (or versus transient) fluctuations in the unemployment gap. Previous work fails to model this dependence, so it finds numerous “inflation puzzles”—such as missing inflation/disinflation—noted in the literature. Our model specification eliminates these puzzles; for example, the Phillips curve has not weakened, and inflation is not “stubbornly low” at present. The model’s coefficients are stable, and it provides accurate conditional recursive forecasts through the Great Recession. The persistence-dependent relationship we uncover is interpretable as being business-cycle-phase-dependent and is thus consistent with existing theory.
Keywords: overheating; recession gap; persistence dependence; NAIRU
JEL Classification: E00, E31, C22, C32, E5
Suggested Citation: Suggested Citation