NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Possible Unemployment Cost of Average Inflation below a Credible Target

Lars E.O. Svensson

NBER Working Paper No. 19442
Issued in September 2013
NBER Program(s):   IFM   ME

If inflation expectations become firmly anchored at the inflation target even when average inflation deviates from the target, the long-run Phillips curve becomes non-vertical. During 1997-2011, average inflation expectations in Sweden have been close to the inflation target of 2 percent, whereas average inflation has fallen short of the target by 0.6 percentage points. The estimates reported suggest that the slope of the long-run Phillips curve is about 0.75. Then the average unemployment rate has been about 0.8 percentage points higher than if average inflation had been on target. This is a large unemployment cost of undershooting the inflation target.

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This paper was revised on April 17, 2014

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Document Object Identifier (DOI): 10.3386/w19442

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