Working Papers

2019-27 | February 2021


Anchored Inflation Expectations and the Slope of the Phillips Curve


We estimate a New Keynesian Phillips curve that allows for changes in the degree of anchoring of agents' subjective inflation forecasts. The estimated slope coefficient in U.S. data is highly significant and stable over the period 1960 to 2019. Out-of- sample forecasts with the model resolve both the "missing disinflation puzzle" during the Great Recession and the "missing inflation puzzle" during the subsequent recovery. Using a simple New Keynesian model, we show that if agents solve a signal extraction problem to disentangle temporary versus permanent shocks to inflation, then an increase in the policy rule coefficient on inflation serves to endogenously anchor agents' inflation forecasts. Improved anchoring reduces the correlation between changes in inflation and the output gap, making the backward-looking Phillips curve appear flatter. But at the same time, improved anchoring increases the correlation between the level of inflation and the output gap, leading to a resurrection of the "original" Phillips curve. Both model predictions are consistent with U.S. data since the late 1990s.

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Article Citation

Jorgensen, Peter Lihn, and Kevin J. Lansing. 2019. "Anchored Inflation Expectations and the Slope of the Phillips Curve," Federal Reserve Bank of San Francisco Working Paper 2019-27. Available at