The Intermittent Phillips Curve: Finding a Stable (But Persistence- Dependent) Phillips Curve Model Specification

<div>We make substantial progress on understanding the Phillips curve, yielding important monetary</div><div>policy implications. Inflation responds differently to persistent versus moderately persistent (or</div><div>transient) fluctuations in the unemployment gap. This persistence-dependent relationship aligns</div><div>with business-cycle stages, and is consistent with existing theory. Previous work fails to model</div><div>this dependence, thereby finding the numerous “inflation puzzles” – e.g., missing</div><div>inflation/disinflation – noted in the literature. Our specification eliminates these puzzles; e.g., the</div><div>Phillips curve has not weakened; inflation’s post-2012 slow upward trudge was predictable. The</div><div>model’s coefficients are stable, and it provides accurate out-of-sample conditional recursive</div><div>forecasts through the Great Recession and recovery.</div><div>Keywords: overheating; recession gap; frequency dependence; NAIRU; Phillips curve.</div>