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.
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- Acknowledgements & Disclosure
- This paper was prepared for the "Federal Reserve Bank of Kansas City’s 2024 Jackson Hole Economic Symposium." We especially thank Pascal Michaillat and Aysegul Sahin for educating us about labor market frictions, while absolving them of any errors, which are entirely our own. We would also like to thank our discussants, Guido Lorenzoni and Ivan Werning, as well as Hyeonseo Lee, Adrien Foutelet, and Can Soylu for their outstanding research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- DOI
- https://doi.org/10.3386/w33095
- Pages
- 53
- Published in
- United States of America
Table of Contents
- Introduction 3
- The labor shortage, supply bottlenecks and the 2020s inflation surge 7
- Evidence of labor shortage 7
- Evidence of supply shortages 12
- The return of the non-linear Phillips curve and the role of super-charged supply shocks 14
- Basic correlations 14
- Traditional statistical analysis of Phillips curves allowing for non-linearity 15
- The Fed credibility and the inflation surges of 1960s vs 2020s 19
- The relationships between inflation and v/u, and the INV-L New Keynesian Phillips Curve 22
- Using the INV-L Phillips curve to understand the inflation surge of 2020s 25
- Revisiting the Beveridge curve 27
- The U.S. Beveridge curve in the 21st century 28
- Four inflation surges of the 20th century and the adjustment of v/u 29
- A minimalistic model of a Beveridge Curve 31
- The Beveridge curve and the policy debate when the Fed tightened policy in 2022 35
- A generalized Beveridge curve and the BT unemployment rate 39
- Beveridge-Threshold (BT) unemployment rate 42
- Landing beyond the Beveridge threshold 45
- Conclusion: policy implications 46
