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How curvy is the Phillips curve?

Author

Listed:
  • Bunn, Philip

    (Bank of England)

  • Anayi, Lena

    (Bank of England)

  • Bloom, Nicholas

    (Stanford University)

  • Mizen, Paul

    (King’s College London)

  • Thwaites, Gregory

    (University of Nottingham)

  • Yotzov, Ivan

    (Bank of England)

Abstract

Macro data suggest a convex relationship between inflation and economic slack, but identifying causality in this setting is challenging. Using data from large panel surveys of UK and US firms we show that the response of prices to demand shocks is also convex at the firm level. We obtain similar results using three different empirical exercises examining: the impact of Covid demand shocks, the response to sales shocks, and hypothetical shocks from a survey question. This convexity is strongest in firms and industries with higher inflation, disappears in horizons beyond two years, and is also present in response to cost shocks. We rationalise these findings in a menu cost model with positive trend inflation and decreasing returns at the firm level, which replicates firm and aggregate Phillips curve convexity. The non‑linearity emerges from trend inflation pushing firms closer to their price increase thresholds.

Suggested Citation

  • Bunn, Philip & Anayi, Lena & Bloom, Nicholas & Mizen, Paul & Thwaites, Gregory & Yotzov, Ivan, 2025. "How curvy is the Phillips curve?," Bank of England working papers 1107, Bank of England.
    • Handle: RePEc:boe:boeewp:1107
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    More about this item

    Keywords

    Inflation; survey data; firms; Phillips curve;
    All these keywords.

    JEL classification:

    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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