Is the Phillips Curve Getting Flatter? | Markus Academy | Ep. 63

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On April 22, 2021, Emi Nakamura joined Markus' Academy to present joint research with Jonathon Hazell, Juan Herreno, and Jon Steinsson. Nakamura is a Professor of Economics at the University of California, Berkeley, and a research associate and co-director of the Monetary Economics Program of the National Bureau of Economic Research.

Download the slides here.*

● The Volcker disinflation led to a dramatic decline in inflation, suggesting the Phillips curve was steeper in the 1970s and 1980s than in more recent decades. During the Great Recession, for example, large increases in unemployment did not produce large changes in inflation, documenting a decline in the "Phillips correlation."

● The New Keynesian Phillips curve holds that inflation is driven by both demand and supply factors as well as inflation expectations. A very flat Phillips curve implies a very "Keynesian" world where prices respond sluggishly to demand pressures, and movements in the Fed's inflation target can be the major determinant of current inflation independent of the curve's slope.

● Long-run inflation expectations have been very stable since the late 1990s but fell dramatically before then, offering a potential explanation for the rapid fall of inflation in the 1980s arising from regime shifts rather than a steep Phillips curve.

● Using regional data to analyze the slope of a regional Phillips curve for non-tradables suggests that the slope was relatively small even in the 1980s, and that most of the reduction in inflation in the early 1980s was associated with shifts in beliefs about the long-run monetary regime. Future research should focus on movements in the long-run inflation target.