Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/300452 
Year of Publication: 
2024
Series/Report no.: 
Staff Report No. 1086
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
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*.
Subjects: 
Phillips curve
unemployment
inflation
natural rate of unemployment
expectations
JEL: 
D84
E24
E31
E32
J11
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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