New SNB Working Paper: Marius Faber and Gabriel Züllig estimate the slope of the Phillips curve in the euro area. They find that, although the Phillips curve is usually quite flat, it becomes substantially steeper when the labor market is tight. Abstract: We estimate the slope of the Phillips curve in the euro area, allowing for nonlinearities – or kinks – in the relationship between labor market slack and inflation. We exploit cross-country variation in labor market conditions in the period 2001-2024, absorbing aggregate shocks and endogenous monetary policy reactions with time fixed effects. We find that while the Phillips curve is usually quite flat, it becomes at least three times as steep if the labor market is sufficiently tight. This kink is more pronounced in the euro area than in the United States, potentially because of more rigid labor markets. Our estimates imply, however, that despite this nonlinearity, the majority of the post-Covid inflation surge was due to factors other than tight labor markets. https://lnkd.in/dWDE5j2Y
Economist at Federal Reserve Board
3dVery interesting results on nonlinearities in the euro area Phillips curve. They resonate with earlier regional work by Antoine Levy focusing on regional wage inflation (https://drive.google.com/file/d/1PT6GKEWFZVmJm0kVIVrzZs66I_K6C2ym/view). Great to see this line of research advancing further! Another interesting application would be to think about Phillips multipliers in the spirit of Barnichon and Mesters.