The Slope of the Phillips Curve: Evidence from U.S. States

Abstract

We estimate the slope of the Phillips curve in the cross section of U.S. states using newly constructed state-level price indexes for non-tradeable goods back to 1978. Our estimates indicate that the slope of the Phillips curve is small and was small even during the early 1980s. We estimate only a modest decline in the slope of the Phillips curve since the 1980s. We use a multiregion model to infer the slope of the aggregate Phillips curve from our regional estimates. Applying our estimates to recent unemployment dynamics yields essentially no missing disinflation or missing reinflation over the past few business cycles. Our results imply that the sharp drop in core inflation in the early 1980s was mostly due to shifting expectations about longrun monetary policy as opposed to a steep Phillips curve, and the greater stability of inflation since the 1990s is mostly due to long-run inflationary expectations becoming more firmly anchored.

Is the Phillips Curve Still a Curve? Evidence from the Regions

“…The first issue is the bias that can be introduced into Phillips curve estimates by the endogenous response of monetary policy to economic conditions. This issue is discussed in several recent papers (Fitzgerald et al 2020;McLeay and Tenreyro 2020;Hazell et al 2020), all of which were motivated by the observation that the US Phillips curve appears to have 'flattened' in recent decades. These papers argue that the true Phillips curve has not flattened to the extent that a simple regression of aggregate inflation on the aggregate unemployment gap would suggest.…”

“…This can bias estimates of the slope of the Phillips curve if movements in long-run inflation expectations are correlated with changes in the unemployment rate. Hazell et al (2020) point to the disinflation in the United States in the early 1980s as an important example of this. The authors argue that the willingness of the Federal Reserve under Chairman Volcker to allow unemployment to rise to a high level sent a credible signal to the public about its commitment to reducing inflation.…”

“…However, this is less of a concern for the RBA's current estimates of the Phillips curve. First, the RBA's existing suite of Phillips curve models control for long-term inflation expectations directly, which minimises the bias discussed by Hazell et al (2020). 20 Second, the estimation samples for the RBA models span a stable monetary policy regime.…”

“…These biases can arise from the endogenous response of monetary policy to economic conditions or changes in long-run inflation expectations, both of which can hinder identification of the Phillips curve in national time series data. The literature covering the US Phillips curve has demonstrated that it is important to account for these biases, and often exploits regional data to do so (Fitzgerald et al 2020;Hazell et al 2020;McLeay and Tenreyro 2020). Although the recent literature largely deals with the price Phillips curve, the same intuition applies when estimating the wage Phillips curve, which is our focus.…”

A Simple Evaluation of Two Decades of Inflation Targeting: Lessons for the New Monetary Policy Strategy

“…They find that the FOMC does not have the ability to influence all components of inflation and that many of the more unresponsive factors to monetary policy are weighted prominently in the Fed's preferred core measure of PCE. Related works by McLeay and Tenreyro (2020), Hazell et al (2020), and Bharadwaj and Dvorkin (2020) document the flat Phillips phenomena and provide empirical and theoretical reasons for the recent flatness, calling into question the relative trade-off between the Fed's two measures in its dual mandate.…”