Is The Phillips Curve Alive and Well After All? Inflation Expectations and the Missing Disinflation

Olivier Coibion, Yuriy Gorodnichenko

NBER Working Paper No. 19598
Issued in October 2013
NBER Program(s):   EFG   ME

We evaluate possible explanations for the absence of a persistent decline in inflation during the Great Recession and find commonly suggested explanations to be insufficient. We propose a new explanation for this puzzle within the context of a standard Phillips curve. If firms' inflation expectations track those of households, then the missing disinflation can be explained by the rise in their inflation expectations between 2009 and 2011. We present new econometric and survey evidence consistent with firms having similar expectations as households. The rise in household inflation expectations from 2009 to 2011 can be explained by the increase in oil prices over this time period.

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Document Object Identifier (DOI): 10.3386/w19598

Forthcoming: Is The Phillips Curve Alive and Well After All? Inflation Expectations and the Missing Disinflation, Olivier Coibion, Yuriy Gorodnichenko. in Lessons from the Financial Crisis for Monetary Policy, Gertler. 2014

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