Beveridgean Phillips Curve

TL;DR

This paper introduces a Beveridgean Phillips curve model based on directed-search pricing, linking inflation and unemployment, and captures key empirical features of US data including divine coincidence and kinked relationships.

Contribution

It develops a novel Beveridgean Phillips curve framework based on directed-search pricing, contrasting with traditional models, and explains recent US data features.

Findings

The model guarantees divine coincidence between inflation and unemployment.

It shows the Phillips curve shifts with the Beveridge curve but not with labor-market tightness.

The curve exhibits a kink at divine coincidence when wage decreases are costly.

Abstract

This paper proposes a new, Beveridgean model of the Phillips curve. While the New Keynesian Phillips Curve is based on monopolistic pricing under price-adjustment costs, the Beveridgean Phillips curve is based on directed-search pricing under price-adjustment costs. Under directed-search pricing, prices respond to slack instead of marginal costs. The Beveridgean Phillips curve links the inflation gap to the unemployment gap, with the following properties. First, it produces the divine coincidence: it guarantees that the rate of inflation is on target whenever the rate of unemployment is efficient. Second, whenever the Beveridge curve shifts, the Phillips curve shifts if it is formulated with inflation and unemployment, but it remains unaffected if it is formulated with inflation and labor-market tightness. Third, the Phillips curve displays a kink at the point of divine coincidence if we assume that wage decreases -- which reduce workers' morale -- are more costly to producers than price increases -- which upset customers. These three properties describe recent US data well.