Low Inflation Bends the Phillips Curve Around the World

24 Pages Posted: 9 Nov 2021

See all articles by Christopher Collins

Christopher Collins

Morgan Stanley

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

Multiple version iconThere are 3 versions of this paper

Date Written: September 1, 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.

Keywords: economic slack, Globalization, monetary policy, Output gap, price dynamics

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

Suggested Citation

Collins, Christopher and Forbes, Kristin J. and Gagnon, Joseph, Low Inflation Bends the Phillips Curve Around the World (September 1, 2021). CEPR Discussion Paper No. DP16583, Available at SSRN: https://ssrn.com/abstract=3960155

Christopher Collins (Contact Author)

Morgan Stanley ( email )

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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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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Joseph Gagnon

Peterson Institute ( email )

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Washington, DC 20036
United States

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

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