It’s Baaack: The Surge in Inflation in the 2020s and the Return of the Non-Linear Phillips Curve

Pierpaolo Benigno · Gauti B. Eggertsson

134 citations0/0 files storedNational Bureau of Economic Research

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

This paper proposes a non-linear New Keynesian Phillips curve (Inv-L NK Phillips Curve) to explain the surge of inflation in the 2020s.Economic slack is measured as firms' job vacancies over the number of unemployed workers.After showing empirical evidence of statistically significant nonlinearities, we propose a New Keynesian model with search and matching frictions, complemented by a form of wage rigidity, in the spirit of Phillips (1958), that generates strong nonlinearities.Policy implications include the thesis that appropriate monetary policy can bring inflation down without a significant recession and that the recent inflationary surge was mostly generated by a labor shortage --i.e. an exceptionally tight labor market.

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References

1936The General Theory of Employment, Interest and Money.2000Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory*1994Job Creation and Job Destruction in the Theory of Unemployment 1986Investment, Capacity Utilization and the Real Business Cycle 2013An Essay on the Principle of Population (1798)1967Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time 2005Employment Fluctuations with Equilibrium Wage Stickiness 1958The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957

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