The L-Shaped Phillips Curve: Theoretical Justification and Empirical Implications

Narayana R. Kocherlakota

NBER Working Paper No. 24086
Issued in November 2017
NBER Program(s):Economic Fluctuations and Growth

This paper has two parts. In the first part, I demonstrate that, in the absence of price and wage bounds, monetary models do not have current equilibria - and so lack predictive content - for a wide range of possible policy rules and/or beliefs about future equilibrium outcomes. This non-existence problem disappears in models in which firms face (arbitrarily loose) finite upper bounds on prices or positive lower bonds on nominal wages. In the second part, I study the properties of a class of dynamic monetary models with these kinds of bounds on prices/wages. Among other results, I show that these models imply that the Phillips curve is L-shaped, are consistent with the existence of permanently inefficiently low output (secular stagnation), and do not imply that forward guidance is surprisingly effective. I show too that economies with lower nominal wage floors have even worse equilibrium outcomes in welfare terms. It follows that models with arbitrarily low but positive nominal wage floors are not well approximated by models without wage floors.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w24086

Users who downloaded this paper also downloaded* these:
Frankel w12713 The Effect of Monetary Policy on Real Commodity Prices
Blanchflower and Oswald w11416 Happiness and the Human Development Index: The Paradox of Australia
Blanchard w24057 Should we Get rid of the Natural Rate Hypothesis?
Baqaee and Farhi w24007 Productivity and Misallocation in General Equilibrium.
Blanchard and Das w24068 A New Index of Debt Sustainability
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us