CEPII, Recherche et Expertise sur l'economie mondiale
Nonlinearity of the inflation-output trade-off and time-varying price rigidity

Antonia López-Villavicencio
Valérie Mignon

 Highlights :

 Abstract :
Relying on the backward-looking Phillips curve; we estimate the level of inflation that erodes price rigidity and investigate its time constancy. To this end; we employ smooth transition regression models with rolling regressions to account for varying threshold inflation levels. Studying six advanced countries over the 1970-2012 period; our results show that both the slope of the Phillips curve and the threshold; trend inflation that erodes price rigidity are time varying. These characteristics could not be captured by a static linear or nonlinear model; illustrating the rich flexibility embedded in our proposed model.

 Keywords : Phillips curve | inflation | price rigidity | nonlinearity | menu costs

 JEL : E31, C22
CEPII Working Paper
N°2013-02, January 2013

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 Fields of expertise

Money & Finance