Did the Federal Reserve Break the Phillips Curve? Theory and Evidence of Anchoring Inflation Expectations

September 3, 2020
By Brent Bundick, Research and Policy Advisor , A. Lee Smith, Research and Policy Advisor


Research Working PaperCommunicating a longer-run inflation objective better anchored inflation expectations in the United States, which may explain the weaker relationship between inflation and unemployment in recent years.

In a macroeconomic model with drifting long-run inflation expectations, the anchoring of inflation expectations manifests in two testable predictions. First, expectations about inflation far in the future should no longer respond to news about current inflation. Second, better-anchored inflation expectations weaken the relationship between unemployment and inflation, flattening the reduced-form Phillips curve. We evaluate both predictions and find that communication of a numerical inflation objective better anchored inflation expectations in the United States but failed to anchor expectations in Japan. Moreover, the improved anchoring of U.S. inflation expectations can account for much of the observed flattening of the Phillips curve. Finally, we present evidence that initial Federal Reserve communication around its longer-run inflation objective may have led inflation expectations to anchor at a level below 2 percent.

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RWP 20-11, September 2020

JEL Classification: E31, E52, E58

Article Citation

  • Bundick, Brent, and A. Lee Smith. “Did the Federal Reserve Break the Phillips Curve? Theory and Evidence of Anchoring Inflation Expectations.” Federal Reserve Bank of Kansas City, Research Working Paper no. 20-11, September. Available at https://doi.org/10.18651/RWP2020-11

Related Research

  • Coibion, Olivier, and Yuriy Gorodnichenko. 2015. “Is the Phillips Curve Alive and Well After All? Inflation Expectations and the Missing Disinflation.” American Economic Journal: Macroeconomics, vol. 7, no. 1, pp. 197–232. Available at https://doi.org/10.1257/mac.20130306
  • Gürkaynak, R. S., A. Levin, and E. Swanson. 2010. “Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from the U.S., UK, and Sweden.” Journal of the European Economic Association, vol. 8, no. 6, pp. 1208–1242.

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