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Non-Linear Phillips Curves with Inflation Regime-Switching

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  • Jeremy J. Nalewaik

Abstract

Building on the results in Nalewaik (FEDS 2015-93), this work models wage growth and core PCE price inflation as regime-switching processes, whose characteristics in the 1970s, 1980s and early 1990s differ fundamentally from their characteristics in the 1960s and from the mid-1990s to present. The key innovation here is the addition to the models of fundamental driving variables like labor-market slack, and the evidence strongly suggests a non-linear effect of slack on wage growth and core PCE price inflation that becomes much larger after labor markets tighten beyond a certain point. The results are informative for assessing the likelihood and risks of meeting certain inflation targets on a sustained basis.

Suggested Citation

  • Jeremy J. Nalewaik, 2016. "Non-Linear Phillips Curves with Inflation Regime-Switching," Finance and Economics Discussion Series 2016-078, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2016-78
    DOI: 10.17016/FEDS.2016.078
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    References listed on IDEAS

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    Cited by:

    1. Renaud St-Cyr, 2018. "Non-linéarité de la courbe de Phillips : un survol de la littérature," Staff Analytical Notes 2018-3, Bank of Canada.
    2. Hooper, Peter & Mishkin, Frederic S. & Sufi, Amir, 2020. "Prospects for inflation in a high pressure economy: Is the Phillips curve dead or is it just hibernating?," Research in Economics, Elsevier, vol. 74(1), pages 26-62.
    3. Giuliana Passamani & Alessandro Sardone & Roberto Tamborini, 2022. "Inflation puzzles, the Phillips Curve and output expectations: new perspectives from the Euro Zone," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(1), pages 123-153, February.

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    More about this item

    Keywords

    Markov-switching; NAIRU; threshold regressions; Wage Inflation; Core PCE prices;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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