Has the Swiss Phillips curve flattened over the years?

Interesting article by Stefan Gerlach, Chief Economist of EFG Bank.

In many economies, inflation may have remained stubbornly low during the recovery because their Phillips curves have become flatter. This column uses an analysis of Swiss data since 1916 that support this argument. The most recent structural break in the Swiss Phillips curve occurred in 1994, when it became much flatter. Previous structural breaks suggest that this has been a change from an above-average to a below-average slope, not a collapse from the long-term normal level.

Despite Friedman rejecting Philips Curve, it remains on of the most important macro idea. Moreover, Friedman wrote about times when we had high inflation and positive rates. It is all so confusing now.

Overall, these findings suggest that the change of the slope of the Phillips curve between the 1970s and 1990s, as emphasised by Blanchard et al. (2015), was an abrupt fall from an above-average to a below-average slope, not a collapse from some historically ‘normal’ slope to almost zero. If so, the current flat Phillips curve may be merely a temporary phenomenon that will soon increase in slope.

The analysis also raises questions for future work. First, how country-specific are the observed changes in the slope of the Swiss Phillips curve, and to what extent are they also present in data from other economies? It would be interesting to know if Phillips curves elsewhere were unusually steep in the 1970s.

Second, to what extent can we separate different hypotheses for changes in the slope of the Phillips curve? Consider the most recent period: the Phillips curve hay have indeed flattened, but we might have confused shifts in the level and the slope of the Phillips curve. This could happen if, for instance, we have underestimated the amount of slack in the economy.

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