Did the Global Financial Crisis Break the U.S. Phillips Curve?

Author/Editor:

Stefan Laseen ; Marzie Taheri Sanjani

Publication Date:

July 5, 2016

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Inflation dynamics, as well as its interaction with unemployment, have been puzzling since the Global Financial Crisis (GFC). In this empirical paper, we use multivariate, possibly time-varying, time-series models and show that changes in shocks are a more salient feature of the data than changes in coefficients. Hence, the GFC did not break the Phillips curve. By estimating variations of a regime-switching model, we show that allowing for regime switching solely in coefficients of the policy rule would maximize the fit. Additionally, using a data-rich reduced-form model we compute conditional forecast scenarios. We show that financial and external variables have the highest forecasting power for inflation and unemployment, post-GFC.

Series:

Working Paper No. 2016/126

Subject:

English

Publication Date:

July 5, 2016

ISBN/ISSN:

9781498348645/1018-5941

Stock No:

WPIEA2016126

Pages:

42

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