Laurence Ball, Gita Gopinath, Daniel Leigh, Prachi Mishra, Antonio Spilimbergo, 07 May 2021

How high is the ongoing US fiscal expansion likely to push inflation? This column presents new evidence that underlying (weighted median) CPI inflation has so far steadily declined since the start of the COVID-19 crisis, broadly as predicted by its historical Phillips curve relation. If the ongoing fiscal expansion reduces unemployment to 1.5-3.5%, as some predict, underlying inflation could rise to about 2.5-3% by 2023. If the fiscal expansion is temporary and monetary policy remains clearly communicated and decisive, there is little risk of a 1960s-type inflationary spiral.

Manoj Pradhan, Charles Goodhart, 26 February 2021

Milton Friedman and Bill Phillips most likely assumed that their separate methods for predicting inflation would lead to much the same outcomes. Recently, however, monetary aggregates and the Phillips curve have provided extremely disparate signals. This column discusses recent economic developments leading to these disparate signals, concluding that inflation will most likely end up somewhere between the predictions of the two models – which is almost certainly higher than what central banks and the IMF are expecting.

Marco Lombardi, Marianna Riggi, Eliana Viviano, 22 December 2020

The Phillips curve – the relationship between economic activity and inflation – has become elusive since the 1980s in most advanced economies, including the euro area. This column argues that an important driver of this phenomenon is the erosion of workers’ bargaining power, which induced firms to react to business cycle fluctuations by adjusting the number of workers rather than hours worked per employee.

Marco Del Negro, Michele Lenza, Giorgio Primiceri, Andrea Tambalotti, 18 September 2020

The analysis of inflation dynamics and their possible changes over time is a key input in the design of monetary policy, particularly in the context of the strategy reviews recently undertaken by the Federal Reserve and currently under way at the ECB and other central banks. This column studies the causes of the stability of US inflation over the business cycle since the 1990s. It concludes that the stability is mainly due to a reduced sensitivity of firms’ pricing decisions to their cost pressures. Ignoring this observation could impair the ability of monetary policy to steer inflation toward its objective.

Michael Ehrmann, Marek Jarociński, Christiane Nickel, Chiara Osbat, Andrej Sokol, 05 February 2020

Inflation in advanced economies fell by less than expected in the wake of the financial crisis, while more recently, measures of slack and underlying inflation in the euro area have seen a disconnect. These and other inflation developments since the Global Crisis have surprised policymakers, practitioners, and academics alike. This column outlines the evidence presented at a recent ECB conference which aimed at enhancing collective understanding of the drivers and dynamics of inflation. 

Laurence Ball, Sandeep Mazumder, 04 February 2020

Inflation did not fall as much as the textbook Phillips curve would predict during Europe’s recessions of 2008 and 2011, and it has not risen as much as the theory would predict during recovery. This column argues that adapting the Phillips curve to use a weighted median of industry inflation rates results in a much better fit with observed inflation. Adding the effect of headline inflation shocks improves the fit further.

Christiane Nickel, Elena Bobeica, Gerrit Koester, Eliza Lis, Mario Porqueddu, Cecilia Sarchi, 25 November 2019

Wage growth in the euro area over 2013 to 2017 was subdued despite notable improvements in the labour market, leading some to claim a breakdown of the output–inflation relationship. This column presents comparative analyses of wage developments in the euro area, showing that the Phillips curve is alive and well and can be used to explain much of the weakness in wage growth during 2013-2017. Other factors also found to have played a role include compositional effects, the possible non-linear reaction of wage growth to cyclical improvements, and structural and institutional factors. 

Roger Farmer, Giovanni Nicolò, 20 May 2019

The economies of many countries are operating close to full capacity, but unemployment and inflation are both low. Using data from the US, UK and Canada, this column compares differences in the macroeconomic behaviour of real GDP, the inflation rate and the yields on three-month Treasury securities in the three countries. It shows that the Farmer monetary model, closed with a belief function, outperforms the New Keynesian model, closed with the New Keynesian Phillips curve. The data fit the multiple equilibria emphasised in the Farmer model well, rather than the mean-reverting processes assumed by the New Keynesian model. 

Giuseppe Ferrero, Mario Pietrunti, Andrea Tiseno, 21 March 2019

Dealing with uncertainty about the state of the economy is one of the main challenges facing monetary policymakers. In recent years there has been an extensive debate on the value of some of the deep parameters driving the economy, such as the natural rate of interest and the slope of the Phillips curve, estimates of which are quite uncertain. This column argues that when facing uncertainty on the structural relationship among macroeconomic variables, central banks should adopt a pragmatic and data-dependent approach to adjusting their monetary policy stance. 

Claudio Borio, Piti Disyatat, Mikael Juselius, Phurichai Rungcharoenkitkul, 18 October 2018

Has the decline in real (inflation-adjusted) interest rates over the last 30 years been driven by variations in desired saving and investment, as commonly presumed? And is this a useful way of thinking about the determination of real interest rates more generally, at least over long horizons? This column finds that this is not the case by systematically examining the relationship between several saving-investment drivers and market real interest rates (as well as estimates of natural rates) since the 1870s and for 19 countries. By contrast, a clear and robust role for monetary policy regimes emerges. The analysis has significant implications for the notion of monetary neutrality and policymaking.

Michael McLeay, Silvana Tenreyro, 03 July 2018

The Phillips curve – a positive relationship between inflation and economic slack – is one of the building blocks of the standard macroeconomic models used for forecasting and policy advice in central banks. On the face of it, recent findings of a breakdown in this relationship would therefore have major implications for monetary policy. This column argues that these findings are perfectly consistent with a stable underlying Phillips curve. The reason is simple: monetary policy will typically seek to reduce output whenever inflation is set to rise above target, blurring the identification of the Phillips curve in the data.

Christiane Nickel, 28 July 2017

The past decade has seen a growing role for global slack in Phillips curve approaches, as opposed to the traditional focus on domestic slack. This column explores whether augmenting Phillips curves by measures of foreign slack can help to better explain past developments in underlying inflation. A majority of specifications, both with and without foreign slack, are found to yield very similar results. Even for periods when domestic slack differed substantially from foreign slack, like between 2012 and 2016, the effects seem to be rather small.

Stefan Gerlach, 05 June 2017

In many economies, inflation may have remained stubbornly low during the recovery because their Phillips curves have become flatter. This column uses an analysis of Swiss data since 1916 that support this argument. The most recent structural break in the Swiss Phillips curve occurred in 1994, when it became much flatter. Previous structural breaks suggest that this has been a change from an above-average to a below-average slope, not a collapse from the long-term normal level.

Laurence Ball, Anusha Chari, Prachi Mishra, 14 April 2017

The inflation rate in India rose from 3.7% to 12.1% between 2001 and 2010, raising concerns that it will rise again. This column separately analyses India's core and headline inflation rates and argues that the average level of core inflation has been consistently less than that of headline inflation. Short-term volatility in prices, especially for food, has driven India’s headline inflation. Estimating a Phillips curve suggests a core inflation–output trade-off in India similar to that of advanced economies during the 1970s and 1980s.

Marco Fioramanti, Robert Waldmann, 19 November 2016

The European Commission is currently evaluating compliance with the Stability and Growth Pact across the Eurozone. However, differences in the econometric methods used by member states and by the Commission can lead to estimates that are at odds. This column argues that the Commission’s method of estimating the non-accelerating wage rate of unemployment for Eurozone members, which relies on an accelerationist Phillips curve, is inferior to specifications with a traditional Phillips curve. The findings highlight how technical aspects of an estimation procedure can have serious effects on policy outcomes.

Carlos Garriga, Finn Kydland, Roman Šustek, 16 October 2016

Central banks responded to the financial crisis by cutting policy rates to prevent deflation and curb the decline in economic activity, but these responses have been anything but temporary. This column explores whether the sticky price channel is still relevant in an environment of persistently low rates. Although the effectiveness of the sticky price channel is limited, monetary policy instead transmits through mortgage debt. The recent period of low rates and low inflation has redistributed income and consumption from savers to mortgage borrowers.

Laurence Ball, Sandeep Mazumder, 07 January 2015

Researchers have put forward two explanations for the failure of the US inflation rate to fall as far during the Great Recession as the Phillips curve would predict. Either expectations have been successfully anchored by the Fed’s inflation target, or the Phillips curve is focusing on the wrong thing – aggregate unemployment instead of short-term unemployment. This column shows that the two explanations are complementary; together, they explain the puzzle, but separately they cannot.

Martin Weale, Tomasz Wieladek, 10 June 2014

After reducing their policy rates close to zero in response to the global financial crisis, the Bank of England and the Federal Reserve began purchasing assets. This column assesses the effect of these asset purchases on output and inflation. In line with previous studies, the authors find that asset purchase announcements are associated with increases in both output and inflation in both countries. They also find that quantitative easing had a larger impact on UK inflation, which suggests that the UK Phillips curve is steeper.



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