Low Inflation Bends the Phillips Curve Around the World

23 Pages Posted: 7 Oct 2021 Last revised: 15 Aug 2022

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); Centre for Economic Policy Research (CEPR)

Joseph Gagnon

Peterson Institute

Christopher Collins

Morgan Stanley

Multiple version iconThere are 3 versions of this paper

Date Written: October 2021

Abstract

This paper finds strong support for a Phillips curve that becomes nonlinear when inflation is “low”—which our baseline model defines as less than 3 percent. The nonlinear curve is steep when output is above potential (slack is negative), but flat when output is below potential (slack is positive), so that further increases in economic slack have little effect on inflation. This finding is consistent with evidence of downward nominal wage and price rigidity. When inflation is high, the Phillips curve is linear and relatively steep. These results are robust to placing the threshold between the high and low inflation regimes at 2, 3, or 4 percent inflation or for a threshold based on country-specific medians of inflation. In this nonlinear model, international factors play a large role in explaining headline inflation (albeit less so for core inflation), a role that has been increasing since the global financial crisis.

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Suggested Citation

Forbes, Kristin J. and Gagnon, Joseph and Collins, Christopher, Low Inflation Bends the Phillips Curve Around the World (October 2021). NBER Working Paper No. w29323, Available at SSRN: https://ssrn.com/abstract=3935511

Kristin J. Forbes (Contact Author)

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Joseph Gagnon

Peterson Institute ( email )

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Christopher Collins

Morgan Stanley

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