What question did this study set out to answer?

To resolve why inflation in the United States did not decline as steeply as standard Phillips curve models predicted during and immediately after the Great Recession.

March 1, 2011Brookings Papers on Economic Activity

Inflation Dynamics and the Great Recession

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Authors

LBLaurence BallInternational Monetary Fund SMSandeep MazumderBaylor University

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Implication

Empirical macroeconomic analysis reveals that adjusted Phillips curve models account for US inflation stability during the Great Recession, highlighting partial anchoring of expectations.

Key Points

To resolve why inflation in the United States did not decline as steeply as standard Phillips curve models predicted during and immediately after the Great Recession.
Estimated traditional Phillips curves on US macroeconomic data from 1960 to 2007 to predict inflation over 2008–2010.
Adjusted the Phillips curve specification by substituting weighted median consumer price inflation for standard core inflation and allowing the curve's slope to vary with inflation level and variance.
Assessed historical inflation expectations for shock-anchoring and level-anchoring, and tested the empirical validity of the New Keynesian Phillips curve with rational expectations.
Standard 1960–2007 Phillips curves severely overpredicted disinflation during 2008–2010, an anomaly fully resolved by incorporating median inflation and variance-dependent slopes derived from costly price adjustment theory.
Inflation expectations have exhibited complete shock-anchoring since the 1980s, whereas level anchoring has developed only gradually and partially.
Observed inflation behavior during the Great Recession provided clear empirical evidence refuting the New Keynesian Phillips curve with rational expectations.

Cite This Study

Ball et al. (2011) studied this question.

synapsesocial.com/papers/69dbc08d5b363cdf1c835da5 https://doi.org/10.1353/eca.2011.0005

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Implication

Empirical macroeconomic analysis reveals that adjusted Phillips curve models account for US inflation stability during the Great Recession, highlighting partial anchoring of expectations.

Inflation Dynamics and the Great Recession

Discussion

Member takes

Implication

Key Points

Cite This Study

Inflation Dynamics and the Great Recession

Discussion

Member takes

Implication

Key Points

Cite This Study

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