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Federal Reserve Bank of San Francisco
FRBSF Economic Letter
Inflation: mind the gap
Zheng Liu
Glenn D. Rudebusch
Abstract

This Economic Letter examines recent evidence concerning the connection between unemployment and inflation. We argue that, in a deep economic downturn such as the current one, inflation and unemployment do tend to move together in a manner consistent with the Phillips curve. But, outside of such severe recessions, fluctuations in the inflation and unemployment rates do not line up particularly well. Inflation appears to be buffeted by many other factors. This explains why some studies find only a "loose empirical relationship" between economic slack and inflation. Thus, compared with the relatively tranquil period between the mid-1980s and the mid-2000s, evidence suggests that recent high unemployment rates are broadly consistent with the sizable decline in core inflation since the fourth quarter of 2007, a relationship that broadly fits the Phillips curve model.


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Zheng Liu & Glenn D. Rudebusch, "Inflation: mind the gap" , Federal Reserve Bank of San Francisco, FRBSF Economic Letter, number 02, 2010.
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Keywords: Inflation (Finance) ; Unemployment ; Phillips curve
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