Inflation Dynamics with a Generalized Lucas Phillips Curve
Working Paper 33888
DOI 10.3386/w33888
Issue Date
I investigate a generalized form of the Lucas (1972) Phillips curve, in which firms take varying amounts of time to learn aggregate demand, in standard textbook new-Keynesian models. This Phillips curve helps to reconcile the sharp divergence between the standard model on the one hand and the beliefs of most policy analysts and the available evidence on the other. In the standard model, inflation and output rise after interest rates rise, with only the possibility of a one-time downward jump. With the generalized Lucas Phillips curve, inflation is initially unstable, so a small initial disinflation builds up before turning around. The model preserves the desirable long-run stability and neutrality of the standard model.