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This paper provides new estimates of the slope of the Phillips curve? We estimate that the Phillips
curve is very flat, and was very flat even during the Volcker disinflation of the early 1980s. Our
results indicate that shifts in expectations about the conduct of monetary policy explain much of
the drop of inflation in the early 1980s and more firmly anchored inflation expectations explain the
stability of inflation since the mid-1990s. Our estimates are consistent with the insensitivity of in-
flation to unemployment during the both the Great Recession and during the low unemployment
periods of the late 1990s and late 2010s.
An important lesson from our analysis is that when it comes to managing inflation, the ele-
phant in the room is long-run inflation expectations. This view contrasts sharply with the con-
ventional view that managing inflation is about moving up and down a steep Phillips curve. A
crucial question for inflation dynamics is why long-run inflation expectations are sometimes so
firmly anchored but at other times move sharply? Beliefs about inflation in the long run are gov-
erned by beliefs about the long-run behavior of the monetary authority and ultimately the political
process that shapes the long-run behavior of the monetary authority. Since this is fundamentally
a very low-frequency phenomenon, it is not easily pinned down by half a century or so of data
from a single country. While much interesting research has sought to understand the behavior of
long-run inflation expectations, we believe it is still not sufficiently well understood and its crucial
importance for the conduct of monetary policy implies that even more research should focus on
this question.
Sargent (1982) emphasizes that hyperinflations tend to end quickly, much too quickly to be
explained by even a very large value of x in the Phillips curve. In these episodes, it is clear that the
primary cause of the abrupt fall in inflation is an abrupt fall in E¡re+00 associated with an abrupt
change in the policy regime. Volcker's monetary policy constituted a sharp regime shift that was
imperfectly credible at the outset but became gradually more credible as time passed (Erceg and
Levin, 2003; Goodfriend and King, 2005; Bianchi and llut, 2017). This regime shift led to a large
and sustained decline in long-term inflation expectations over the 1980s but also a transitory rise
in unemployment. Perhaps it was this large change in inflation expectations that was the pri-
mary cause of the rapid fall in inflation over this period rather than high unemployment working
through a steep Phillips curve.
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