A Phillips Curve with Anchored Expectations and Short-Term Unemployment
IMF Working Papers, February 25, 2015
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Bibliographic details
- Authors: Laurence M. Ball, Sandeep Mazumder
- Published: February 25, 2015
- Series: IMF Working Papers
Summary and purpose
- Examines recent behavior of core inflation in the United States.
- Specifies a simple Phillips curve based on two assumptions:
- Inflation expectations are fully anchored at the Federal Reserve’s target.
- Labor-market slack is captured by the level of short-term unemployment.
- Proposes a more general Phillips curve in which core inflation depends on short-term unemployment and on expected inflation as measured by the Survey of Professional Forecasters (SPF).
Key findings and empirical results
- The simple anchored-expectations Phillips curve explains inflation behavior since 2000.
- The equation accounts for "the failure of high total unemployment since 2008 to reduce inflation greatly."
- Fit of the simple equation is especially good when core inflation is measured with the Cleveland Fed’s series on weighted median inflation.
- The more general Phillips curve specification fits U.S. inflation since 1985, encompassing:
- The anchored-expectations period of the 2000s.
- The preceding period when expectations were determined by past levels of inflation.
Methodology and data inputs
- Core inflation measures examined include the Cleveland Fed’s series on weighted median inflation.
- Expected inflation is measured using the Survey of Professional Forecasters (SPF) in the general specification.
- Labor-market slack is proxied by the level of short-term unemployment rather than total unemployment.
Policy-relevant implications
- Anchored inflation expectations can alter the inflationary response to unemployment, reducing the sensitivity of inflation to high total unemployment.
- Short-term unemployment is a critical labor-market slack indicator for explaining core inflation dynamics in the U.S. since 2000.
- Incorporating direct measures of expected inflation (SPF) yields a Phillips curve that explains a longer historical span (since 1985), implying policy analysis should account for the evolving formation of expectations.