Working Paper Revision

Finding a Stable Phillips Curve Relationship: A Persistence-Dependent Regression Mode

Abstract: We establish that the Phillips curve is persistence-dependent: inflation responds differently to persistent versus moderately persistent (or versus transient) fluctuations in the unemployment gap. Previous work fails to model this dependence, so it finds numerous “inflation puzzles”—such as missing inflation/disinflation—noted in the literature. Our model specification eliminates these puzzles; for example, the Phillips curve has not weakened, and inflation is not “stubbornly low” at present. The model’s coefficients are stable, and it provides accurate conditional recursive forecasts through the Great Recession. The persistence-dependent relationship we uncover is interpretable as being business-cycle-phase-dependent and is thus consistent with existing theory.

Keywords: NAIRU; persistence dependence; recession gap; overheating;

JEL Classification: C22; C32; E00; E31; E5;

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2020-04-08

Number: 19-09R

Note: *First posted May 2019 and originally titled “Variation in the Phillips Curve Relation across Three Phases of the Business Cycle.”

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