Finding a Stable Phillips Curve Relationship: A Persistence-Dependent Regression Model

60 Pages Posted: 28 May 2019 Last revised: 18 May 2020

See all articles by Richard A. Ashley

Richard A. Ashley

Virginia Tech. - Department of Economics

Randal Verbrugge

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: April 8, 2020

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 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

Ashley, Richard A. and Verbrugge, Randal, Finding a Stable Phillips Curve Relationship: A Persistence-Dependent Regression Model (April 8, 2020). FRB of Cleveland Working Paper No. 19-09R, 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 Banks - Federal Reserve Bank of Cleveland ( email )

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

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