Inflation Expectations and Nonlinearities in the Phillips Curve
The Phillips curve, which shows the connection between inflation and unemployment, typically reflects an inverse relationship: as inflation increases, unemployment decreases, and vice versa. During the 1970s and ‘80s, much research focused on understanding the causes and costs of high inflation using this model. Since then, researchers have challenged the validity of the Phillips curve—particularly during the 2010s, when the unemployment rate skyrocketed but inflation did not decline as much as the curve predicted it would. The authors of this paper set out to explore the apparent lack of validity of the Phillips curve during the missing disinflation of the 2010s.