Return of the Original Phillips Curve

Phillips curve is dead. Long live the Phillips Curve.

Peter Lihn Jørgensen and Kevin J. Lansing in this San Francisco Fed paper says Philips Curve is working in its original avatar:

The link between changes in U.S. inflation and the output gap has weakened in recent decades. Over the same time, a positive link between the level of inflation and the output gap has emerged, reminiscent of the original 1958 version of the Phillips curve. This development is important because it indicates that structural changes in the economy have not eliminated the inflationary pressure of gap variables. Improved anchoring of people’s expectations for inflation, which makes the expected inflation term in the Phillips curve more stable, can account for both observations.

 

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