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A Phillips Curve with Anchored Expectations and Short‐Term Unemployment
Author(s) -
BALL LAURENCE,
MAZUMDER SANDEEP
Publication year - 2019
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12502
Subject(s) - phillips curve , economics , unemployment , inflation (cosmology) , keynesian economics , misery index , core inflation , term (time) , core (optical fiber) , nairu , recession , monetary policy , great recession , full employment , monetary economics , macroeconomics , econometrics , inflation targeting , physics , materials science , composite material , quantum mechanics , theoretical physics
This paper examines the behavior of U.S. core inflation, as measured by the weighted median of industry price changes. We find that core inflation since 1985 is well‐explained by an expectations‐augmented Phillips curve in which expected inflation is measured with professional forecasts and labor‐market slack is captured by the short‐term unemployment rate. We also find that expected inflation was backward‐looking until the late 1990s, but then became strongly anchored at the Federal Reserve's target. This shift in expectations changed the relationship between inflation and unemployment from an accelerationist Phillips curve to a level‐level Phillips curve. Our specification explains why high unemployment during the Great Recession did not reduce inflation greatly: partly because inflation expectations were anchored, and partly because short‐term unemployment rose less sharply than total unemployment.