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Examining the New Keynesian Phillips Curve in the U.S.: Why has the relationship between inflation and unemployment weakened?

Year: 2024

Type: article

Abstract: This paper conducts a comprehensive review of the relationship between inflation and unemployment in the U.S. as described by the Phillips curve in a New Keynesian framework and investigates whether this relationship has changed systematically over time. We also aim to identify possible explanations for these changes. Three different hypotheses are discussed to assess whether they are consistent with more recent developments, such as the evolution of inflation expectations, the impact of globalization, and possible nonlinearities in the functional shape of the Phillips curve. We find that the relationship between inflation and unemployment has weakened since the 1980s and especially during the Covid-19 pandemic due to forces of globalization and better anchored inflation expectations resulting from more credible monetary policy. This has led to question of whether the Phillips curve is outdated. We conclude with the implications of these findings for the conduct of monetary policy.

Source: Research in Economics

DOI: 10.1016/j.rie.2024.100987

Author: Rouven E. Haschka

Institutions: Zeppelin Universität gemeinnützige GmbH, Corvinus University of Budapest

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $2,740