Time-Varying Phillips Curves
Working Paper 19790
DOI 10.3386/w19790
Issue Date
A growing theoretical literature argues that aggregate price flexibility and the inflation-output tradeoff faced by central banks should rise with microeconomic price change dispersion. However, there is little empirical work testing this prediction. I fill this gap by estimating time-varying forward looking New-Keynesian Phillips Curves (NKPC). I reject a NKPC with constant inflation-output tradeoff in favor of a slope that increases with microeconomic volatility. In contrast, there is no evidence that the inflation-output tradeoff varies with aggregate volatility or the business cycle more generally. Furthermore, I show that greater volatility does not affect price flexibility purely through increases in frequency.