Working Paper Revision

The Intermittent Phillips Curve: Finding a Stable (But Persistence-Dependent) Phillips Curve Model Specification

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 rate gap. This persistence-dependent relationship appears to align with business-cycle stages and is thus consistent with existing theory. Previous work fails to model this dependence, thereby finding numerous "inflation puzzles" – e.g., missing inflation/disinflation – noted in the literature. Our specification eliminates these puzzles; for example, the Phillips curve has not weakened, nor was inflation "stubbornly low" in 2019. The model's coefficients are stable, and it provides accurate conditional recursive forecasts through the Great Recession. There are important monetary policy implications.

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

JEL Classification: C22; C32; E31; E32; E5;

https://doi.org/10.26509/frbc-wp-201909r2

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2023-02-14

Number: 19-09R2

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

Note: Appendix - https://www.clevelandfed.org/-/media/project/clevelandfedtenant/clevelandfedsite/publications/working-papers/2023/wp1909r2-app.pdf

Related Works

• Working Paper Revision (2023-02-14) : You are here.
• Working Paper Revision (2020-04-08) : Finding a Stable Phillips Curve Relationship: A Persistence-Dependent Regression Mode
• Working Paper Original (2019-05-03) : Variation in the Phillips Curve Relation across Three Phases of the Business Cycle