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Advances in Phillips Curve Research

Paper Session

Sunday, Jan. 5, 2020 1:00 PM - 3:00 PM (PDT)

Marriott Marquis, Catalina
Hosted By: Econometric Society
  • Chair: Olivier Coibion, University of Texas-Austin

The Inattentive Consumer: Sentiment and Expectations

Rupal Kamdar
,
Indiana University, Bloomington

Abstract

Expectations play a crucial role in macroeconomic models and are commonly assumed to be full-information rational. However, information is vast, costly to obtain, and difficult to understand. Using survey data, I show that consumer beliefs about economic variables are driven by a single component: sentiment. When consumers are “optimistic” (have positive sentiment), they expect the economy to expand but inflation to decline. This correlation stands in contrast to recent U.S. experience. I explain these stylized facts with a model of a rationally inattentive consumer who faces uncertainty about fundamentals. To economize on information costs, the consumer chooses to reduce the dimensionality of the problem and obtain a signal that is a linear combination of fundamentals. Optimal information gathering results in covariances of beliefs that differ from the underlying data-generating process, and in particular leads to countercyclical price beliefs. Thus, monetary policies that aim to stimulate the economy by raising inflation expectations can have counterproductive consequences.

Dynamic Inattention, the Phillips Curve, and Forward Guidance

Hassan Afrouzi
,
Columbia University
Choongryul Yang
,
University of Texas-Austin

Abstract

We develop a model of dynamic information acquisition and show that forward- looking firms smooth their information over time: they decide to forgo learning about the timing of their shocks to learn more about their magnitude. The Phillips curve in our model is forward-looking but not subject to the forward guidance puzzle, as it relates current inflation to the forecast errors of firms about future inflation. Unlike the New Keynesian Phillips curve, inflation is not always increasing in expected inflation and it decreases with expected inflation if firm’s average forecast error about inflation is negative. We test this prediction using data from the Survey of Professional Forecasters and find consistent and significant results. We apply our findings to examine the effectiveness of forward guidance policies in a general equilibrium model. News about future interest rates affects inflation more if firms are more rationally inattentive or if they discount future profits less.

The Slope of the Phillips Curve: Evidence from U.S. States

Emi Nakamura
,
University of California-Berkeley

Abstract

We estimate the slope of the Phillips curve in the cross-section of U.S. states using newly constructed state-level price indexes for non-tradable goods back to 1978. We develop a panel-data identification approach based on tradeable demand spillovers. In contrast to recent research, we find that the Phillips curve has been if anything steeper since 1985 than it was during the Volcker disinflation. We use a multiple region model to infer the slope of the aggregate Phillips Curve from our regional estimates. We show how our findings are consistent with the behavior of aggregate inflation in the early 1980's, once aggregate inflation is measured in a consistent way going back in time. Our results suggest that the sharp drop in inflation in the early 1980s was due to shifting expectations about long-run monetary policy as opposed to a steep Phillips curve.

Anticipating the Phillips Curve: Firms' Joint Expectations of Unemployment and Inflation

Jane Ryngaert
,
Wake Forest University
Olivier Coibion
,
University of Texas-Austin
Yuriy Gorodnichenko
,
University of California-Berkeley
Saten Kumar
,
Auckland University of Technology

Abstract

We implement a new survey of firms, eliciting firms' expectations of the Phillips curve. The survey reveals that firms expectations are consistent with a downward-sloping Phillips curve. We show that managers' perceived Phillips curves respond to information treatments with managers receiving treatments reporting a steeper negative relationship between inflation and unemployment. We further explore models that can explain this reaction.
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
  • E3 - Prices, Business Fluctuations, and Cycles