Nonlinear Phillips Curve with Asymmetric Adjustment Cost

Abstract

A nonlinear New Keynesian (NK) model with more severe downward rigidity in prices has a number of interesting implications. The “standard” NK equilibrium– with the nominal anchor during ELB episodes set by expectations about future monetary policy – exists even for long- lasting ELB episodes. The implied Phillips curve flattens endogenously as the inflation rate falls. This makes it easy to match data from episodes with large negative output gaps and only mild deflation; it can also generate a sharper rise in inflation in response to adverse-supply shocks. The implied fiscal multipliers at the ELB don’t get much larger than unity.

Keywords: Phillips Curve, Pricing Adjustment Costs, NK Nominal Anchor