Has the Phillips Curve Become Steeper?

Abstract

This paper analyzes whether structural changes in the aftermath of the pandemic have steepened the Phillips curves in advanced economies, reversing the flattening observed in recent decades and reducing the sacrifice ratio associated with disinflation. Particularly, analysis of granular price quote data from the UK indicates that increased digitalization may have raised price flexibility, while de-globalization may have made inflation more responsive to domestic economic conditions again. Using sectoral data from 24 advanced economies in Europe, higher digitalization and lower trade intensity are shown to be associated with steeper Phillips curves. Post-pandemic Phillips curve estimates indicate some steepening in the UK, Spain, Italy and the euro area as a whole, but at magnitudes that are too small to explain the entire surge in inflation in 2021–22, suggesting an important role for outward shifts in the Phillips curve.

Keywords: Phillips Curve, Inflation, De-globalization, Digitalization, Structural change, POST-pandemic Phillips curve estimation, Phillips curve estimate, price flexibility, Phillips Curve slope, quote data, Output gap, Real effective exchange rates, Europe

JEL Classification: E31, E52, O33, F41, E23, F31