Publication Type

Low inflation bends the Phillips curve around the world

Kristin Forbes (MIT Sloan School of Management), Joseph E. Gagnon (PIIE) and Christopher G. Collins (PIIE)

Working Papers 20-6


This paper models inflation by combining the multicountry framework of one of its authors (Forbes) with the nonlinear specification proposed by the other two (Gagnon and Collins). The results find strong support for a Phillips curve that becomes nonlinear when inflation is low, in which case excess economic slack has little effect on inflation. This finding is consistent with evidence of downward nominal wage and price rigidity. The estimates also show a significant and economically meaningful Phillips curve relationship between slack and inflation when slack is negative (i.e., when output is above long-run potential). In this nonlinear model, international factors play a large role in explaining headline inflation, a role that has increased over time, supporting the results of Forbes’ linear model.

Data Disclosure:

The data underlying this analysis are available here [zip].