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Abstract
This paper reexamines the Phillips and Beveridge curves to explain the inflation surge in the U.S. during the 2020s. We argue that the pre-surge consensus regarding both curves requires substantial revision. We propose that the Inverse-L (INV-L) New Keynesian Phillips Curve replace the standard New Keynesian Phillips Curve. The INV-L curve is piecewise-linear and more sensitive to labor market conditions when it crosses the Beveridge threshold — a point at which the labor market becomes excessively tight and enters a “labor shortage” regime. We introduce a modified Beveridge curve that features a near-vertical slope once the Beveridge threshold is passed, suggesting that in this region, adjustment in labor market tightness occurs almost exclusively through a drop in vacancies rather than an increase in unemployment. This feature matches the U.S. experience since the Federal Reserve’s tightening cycle began in March 2022. We also observe a similar pattern in the data during five other inflation surges over the past 111 years where the Beveridge threshold was breached. We define a Beveridge-threshold (BT) unemployment rate. Once unemployment falls below this rate, policymakers must be alert to sharp inflationary pressures from demand or supply shocks. We explore several policy implications.
Citation
Pierpaolo Benigno & Gauti B. Eggertsson, 2024. “Revisiting the Phillips and Beveridge Curves: Insights from the 2020s Inflation Surge.” Prepared for the Federal Reserve Bank of Kansas City Economic Policy Symposium, Jackson Hole, Wyoming, August 2024. NBER Working Paper 33095, October 2024.
@techreport{NBERw33095,
title = "Revisiting the Phillips and Beveridge Curves: Insights from the 2020s Inflation Surge",
author = "Benigno, Pierpaolo and Eggertsson, Gauti B",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "33095",
year = "2024",
month = "October",
doi = {10.3386/w33095},
URL = "http://www.nber.org/papers/w33095",
}