It is conventional wisdom that the reduced form Phillips curve has become flatter in recent decades. Accordingly, we show that the statistical relationship between changes in U.S. inflation and economic activity has become flatter. But in contrast, the statistical relationship between the level of inflation and economic activity has become steeper. By allowing for changes in the degree of anchoring of agents’ inflation forecasts, we recover a stable structural slope parameter in an estimated version of the New Keynesian Phillips curve from 1960 to 2019. Using a New Keynesian model with imperfect information, we propose a novel general equilibrium channel through which improved anchoring of expected inflation can help explain the observed changes in the reduced form Phillips curve relationships.
Lansing, Kevin J., and Peter Lihn Jorgensen. 2019. “Anchored Inflation Expectations and the Slope of the Phillips Curve,” Federal Reserve Bank of San Francisco Working Paper 2019-27. Available at https://doi.org/10.24148/wp2019-27