Authors: Richard K. Crump, Stefano Eusepi, Marc Giannoni, and Ayşegül Şahin
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Staff Reports
The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times
Number 1086
March 2024
March 2024
JEL classification: D84, E24, E31, E32, J11
Using a New Keynesian Phillips curve, we document the rapid and persistent increase in the natural rate of unemployment, ut*, in the aftermath of the pandemic and characterize its implications for inflation dynamics. While the bulk of the inflation surge is attributed to temporary supply factors, we also find an important role for current and expected negative unemployment gaps. Through the lens of the model, the 2022-23 disinflation was driven by the expectation that the unemployment gap will close through a progressive decline in ut* and a rise in the unemployment rate. This implies that convergence to long-run price stability depends critically on expectations about labor market tightness. Using a variety of cross-sectional data sources, we provide corroborating evidence of unusually tight labor market conditions, consistent with our estimated rise in ut*.
Author Disclosure Statement(s)
Richard Crump
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times,” joint with Stefano Eusepi, Marc Giannoni, and Ayşegül Şahin. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Stefano Eusepi
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times,” joint with Richard Crump, Marc Giannoni, and Ayşegül Şahin. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Marc Giannoni
My contributions to this research paper were made during my time as an employee of the Federal Reserve Bank of Dallas. At that time, I had no relevant or material financial interests that relate to the research described in my paper entitled “The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times,” joint with Richard Crump, Stefano Eusepi, and Ayşegül Şahin. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Ayşegül Şahin
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times,” joint with Richard Crump, Stefano Eusepi, and Marc Giannoni. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times,” joint with Stefano Eusepi, Marc Giannoni, and Ayşegül Şahin. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Stefano Eusepi
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times,” joint with Richard Crump, Marc Giannoni, and Ayşegül Şahin. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Marc Giannoni
My contributions to this research paper were made during my time as an employee of the Federal Reserve Bank of Dallas. At that time, I had no relevant or material financial interests that relate to the research described in my paper entitled “The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times,” joint with Richard Crump, Stefano Eusepi, and Ayşegül Şahin. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Ayşegül Şahin
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times,” joint with Richard Crump, Stefano Eusepi, and Marc Giannoni. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Suggested Citation:
Crump, Richard K., Stefano Eusepi, Marc Giannoni, and Ayşegül Şahin. 2024. “The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times.” Federal Reserve Bank of New York Staff Reports, no. 1086, March. https://doi.org/10.59576/sr.1086
Crump, Richard K., Stefano Eusepi, Marc Giannoni, and Ayşegül Şahin. 2024. “The Unemployment-Inflation Trade-off Revisited: The Phillips Curve in COVID Times.” Federal Reserve Bank of New York Staff Reports, no. 1086, March. https://doi.org/10.59576/sr.1086
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