Macro Seminar - Qazi Haque (University of Adelaide)

Title: The Long-Run Phillips Curve is . . . a Curve

Abstract: In U.S. data, inflation and output are negatively related in the long run. A Bayesian VAR with stochastic trends generalized to be piecewise linear provides robust reduced-form evidence in favor of a threshold level of trend inflation below which potential output is independent of trend inflation, and above which, instead, potential output is negatively affected by trend inflation. The threshold level of inflation is slightly lower than 4%, above which every percentage point increase in inflation is related to about 1% decrease in potential output per year. A New Keynesian model generalized to admit time-varying trend inflation and estimated via particle filtering provides theoretical foundations to this reduced-form evidence. The structural long-run Phillips Curve implied by the estimated New Keynesian model is not statistically different from the one implied by the reduced-form piecewise linear BVAR model.