Low Inflation Bends the Phillips Curve Around the World

18 Pages Posted: 27 May 2020

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Joseph Gagnon

Peterson Institute

Christopher G Collins

Board of Governors of the Federal Reserve System

Date Written: March 31, 2020

Abstract

This paper models inflation by combining the multi-country framework of one of its authors (Forbes) with the nonlinear specification proposed by the other two (Gagnon and Collins). The results find strong support for a Phillips curve that becomes nonlinear when inflation is low, in which case excess economic slack has little effect on inflation. This finding is consistent with evidence of downward nominal wage and price rigidity. The estimates also show a significant and economically meaningful Phillips curve relationship between slack and inflation when slack is negative (i.e., when output is above long-run potential). In this nonlinear model, international factors play a large role in explaining headline inflation, a role that has increased over time, supporting the results of Forbes’ linear model.

Keywords: Economic Slack, Globalization, Output Gap, Price Dynamics

JEL Classification: E31, E37, E52, E58, F62

Suggested Citation

Forbes, Kristin J. and Gagnon, Joseph and Collins, Christopher G., Low Inflation Bends the Phillips Curve Around the World (March 31, 2020). Peterson Institute for International Economics Working Paper No. 20-6, 2020, MIT Sloan Research Paper No. 6101-20, Available at SSRN: https://ssrn.com/abstract=3577993 or http://dx.doi.org/10.2139/ssrn.3577993

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Room E62-416
Cambridge, MA 02142
United States
617-253-8996 (Phone)

HOME PAGE: http://web.mit.edu/kjforbes/www

National Bureau of Economic Research (NBER)

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Joseph Gagnon (Contact Author)

Peterson Institute ( email )

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Washington, DC 20036
United States

HOME PAGE: http://www.piie.com

Christopher G. Collins

Board of Governors of the Federal Reserve System

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

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