Title: Does the US economy face a long run trade off between inflation and unemployment?

Authors: Jamil Sayeed; Md. Deen Islam; Shanjida Yasmin

Addresses: Department of Economics, Carleton University, 1125 Colonel By Drive, Ottawa, ON K1S 5B6, Canada ' Department of Economics, University of Dhaka, Nilkhet Road, Dhaka 1000, Bangladesh ' Department of Economics, Carleton University, 1125 Colonel By Drive, Ottawa, ON K1S 5B6, Canada

Abstract: As average inflation expectations anchored at the inflation target since 2000 in the USA, the long run Phillips curve may have become downward sloping. Since the great recession 2008-2009, the US economy has experienced an average of 0.22% points of undershooting of the inflation target over the period 2008Q1-2017Q4. This study finds that the long run Phillips curve for the USA has become flatter since 2008. Our estimates show that the US economy faced 1.6% points of higher average unemployment than what would have been the case if average inflation had been equal to the target. This is a significant unemployment cost resulting from both a flatter long run Phillips curve and an undershooting of the inflation target. Our findings suggest that the US economy has been facing a long run trade off between inflation and unemployment since the financial crisis.

Keywords: Phillips curve; undershooting; unemployment cost; inflation target; great recession.

DOI: 10.1504/IJMEF.2019.100264

International Journal of Monetary Economics and Finance, 2019 Vol.12 No.2, pp.118 - 132

Received: 10 Jul 2018
Accepted: 22 Feb 2019
Published online: 23 Jun 2019 *

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