<p>(1) The Phillips curve is not a structural thing, it is not surprising that the relationship between unemployment and inflation is not constant over time.</p>

<p>(2) There's a nice <a href="https://www.aeaweb.org/articles?id=10.1257/aer.20150248" rel="nofollow noreferrer">AER paper</a> by Simon Gilchrist and coauthors that argues that inflation did not go down as much as in earlier recessions because financially constrained firms needed to keep their cash-flows up and increased prices.</p>

CC BY-SA 3.0
2017-07-27T14:20:37.317Z
2017-07-28T06:19:52.487Z
2017-07-28T06:19:52.487Z
Tobias
<p>After the Financial crisis of 2007–2008, the inflation's decay became more persistent in many countries. There are several reasons why:</p>

<ul>
<li>The output gap went below zero in developed economies, however, the inflation level decayed moderately only.</li>
<li>Changes in the structure of employment. The relative rate of highly educated had increased, therefore, the average level of wages raised as well.</li>
<li>Fiscal consolidation. The rise of indirect taxation could hold the inflation at extraordinary high level, too.</li>
</ul>

CC BY-SA 3.0
2017-05-28T12:38:51.510Z
2017-05-28T12:38:51.510Z
Übel Yildmar
<p>The Phillips Curve equation is:
$$\pi_t=\pi_t^e + \beta_1 (\beta_2 Y_t + (1-\beta_2) Z_t) + \varepsilon_t^\pi$$
where $\pi_t$ is the inflation, $\pi_t^e$ is the expected inflation, $Y_t$ is the output level, $Z_t$ is the real exchange rate, and $\varepsilon_t^\pi$ is a stochastic shock.</p>

<p>In a small open economy (semi-structural framework), the impulse response functions to a domestic demand shock are the following:</p>

<p><a href="https://i.sstatic.net/LTzOO.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/LTzOO.png" alt="enter image description here"></a></p>

<p>After the crisis, the Phillips Curve became flatter. My question is, how can one interpret the change in the slope of the Phillips Curve after the crisis?</p>

<macroeconomics><open-economy-macro><financial-crises>
Why did the hybrid Phillips Curve become flatter (as empirical data shows) after the crisis?
Übel Yildmar
# Why did the hybrid Phillips Curve become flatter (as empirical data shows) after the crisis?

(Asked by: username_0 on 2016-12-09)

The Phillips Curve equation is:
$$\pi\_t=\pi\_t^e + \beta\_1 (\beta\_2 Y\_t + (1-\beta\_2) Z\_t) + \varepsilon\_t^\pi$$
where $\pi\_t$ is the inflation, $\pi\_t^e$ is the expected inflation, $Y\_t$ is the output level, $Z\_t$ is the real exchange rate, and $\varepsilon\_t^\pi$ is a stochastic shock.

In a small open economy (semi-structural framework), the impulse response functions to a domestic demand shock are the following:

[![enter image description here](https://i.sstatic.net/LTzOO.png)](https://i.sstatic.net/LTzOO.png)

After the crisis, the Phillips Curve became flatter. My question is, how can one interpret the change in the slope of the Phillips Curve after the crisis?

**Tags:** macroeconomics, open-economy-macro, financial-crises


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## 2 answers

### Answer by username_1 on 2017-07-27. Score: 2

(1) The Phillips curve is not a structural thing, it is not surprising that the relationship between unemployment and inflation is not constant over time.

(2) There's a nice [AER paper](https://www.aeaweb.org/articles?id=10.1257/aer.20150248) by Simon Gilchrist and coauthors that argues that inflation did not go down as much as in earlier recessions because financially constrained firms needed to keep their cash-flows up and increased prices.


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### Answer by username_0 on 2017-05-28. Score: 1

After the Financial crisis of 2007–2008, the inflation's decay became more persistent in many countries. There are several reasons why:

* The output gap went below zero in developed economies, however, the inflation level decayed moderately only.
* Changes in the structure of employment. The relative rate of highly educated had increased, therefore, the average level of wages raised as well.
* Fiscal consolidation. The rise of indirect taxation could hold the inflation at extraordinary high level, too.


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