The Long-Run Phillips Curve is... a Curve

Guido Ascari, Paolo Bonomolo and Qazi Haque

Abstract: In U.S. data, inflation and output are negatively related in the long run. A Bayesian VAR with stochastic trends generalized to be piecewise linear provides robust reduced-form evidence in favor of a threshold level of trend inflation of around 4%, below which potential output is independent of trend inflation, and above which, instead, potential output is negatively affected by trend inflation. Moreover, this negative relationship is quite substantial: above the threshold every percentage point increase in trend inflation is related to about 1% decrease in potential output per year. A New Keynesian model generalized to admit time-varying trend inflation and estimated via particle filtering provides theoretical foundations to this reduced-form evidence. The structural long-run Phillips Curve implied by the estimated New Keynesian model is not statistically different from the one implied by the reduced-form piecewise linear BVAR model.

Keywords: Long-Run Phillips Curve; Inflation; Bayesian VAR; DSGE; Particle Filter (search for similar items in EconPapers)
JEL-codes: C32 C51 E30 E31 E52 (search for similar items in EconPapers)
Date: 2023-08
New Economics Papers: this item is included in nep-dge and nep-mon
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https://www.dnb.nl/media/vfcmbaat/working_paper_no-789.pdf

Related works:
Working Paper: The Long-Run Phillips Curve is... a Curve (2024)
Working Paper: The Long-Run Phillips Curve is... a Curve (2023)
Working Paper: The Long-Run Phillips Curve is... a Curve (2023)
Working Paper: The Long-Run Phillips Curve is... a Curve (2023)
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