How Curvy is the Phillips Curve?

Philip Bunn; Lena Anayi; Nicholas Bloom; Paul Mizen; Gregory Thwaites; Ivan Yotzov

doi:10.3386/w33234

How Curvy is the Phillips Curve?

Philip Bunn, Lena Anayi, Nicholas Bloom, Paul Mizen, Gregory Thwaites & Ivan Yotzov

Working Paper 33234

DOI 10.3386/w33234

Issue Date December 2024

Macro data suggests a convex relationship between inflation and economic slack, but identifying causality is challenging. Using micro data from large panel surveys of UK and US firms we show that the response of prices to demand shocks is also convex at the firm level. We obtain similar results using three different empirical exercises examining: the impact of COVID demand shocks, the response to sales shocks, and hypothetical shocks from a survey question. This convexity is strongest in firms and industries with higher inflation, disappears in horizons beyond two years, and is also present in response to cost shocks. We rationalize these findings in a menu cost model with positive trend inflation and decreasing returns at the firm level, which replicates firm and aggregate Phillips curve convexity. The non-linearity emerges from trend inflation pushing firms closer to their price increase thresholds.

The authors would like to thank Jose Barrero, Steve Davis, Kevin Foster, Brent Meyer, and Emil Mihaylov for the US data, and the Economic and Social Research Council for funding under grant ES/X013707/1. The authors also benefitted from comments by seminar participants in Princeton, Chicago Fed, Boston College, Bristol, LSE, UCL, Warwick, Nottingham, Sciences Po, Banca d’Italia, the IMF as well as at the BCEA, ICEA, ECB, ASSA, SITE, CBBS, MMF, RES, and SUERF conferences. Any views expressed are solely those of the authors and so cannot be taken to represent those of the Bank of England or to state Bank of England policy. This paper should therefore not be reported as representing the views of the Bank of England or members of the Monetary Policy Committee, Financial Policy Committee, or Prudential Regulation Committee. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Nicholas Bloom
I worked for McKinsey and company as a management consultant from 2001-2002. I have not received any funding from them after that time.

I am part of the Toulouse Network for Information Technology, which carries out research on IT and productivity. From this network I receive an annual honorarium, which is funded by Microsoft.

I do occasional consulting on management practices for government and policy agencies, like the Canadian Government, the World Bank, the European Union, the British Government, and the European Bank of Reconstruction and Development.

I produced a report in 2008 for the World Economic Forum on management practices in private equity for which I received an honorarium.

I am a paid speaker at corporate events at which I discuss among other things working from home, management practices and policy uncertainty.
MARC RIS BibTeΧ

How Curvy is the Phillips Curve?

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