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  3. American Economic Journal: Macroeconomics
  4. January 2015
  5. The Possible Unemployment Cost of Average Inflation below a Credible Target

The Possible Unemployment Cost of Average Inflation below a Credible Target

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Abstract

If inflation expectations become firmly anchored at the inflation target even when average inflation deviates from the target, the long-run Phillips curve becomes nonvertical. During 1997-2011, average inflation expectations in Sweden have been close to the inflation target of 2 percent, whereas average inflation has fallen short of the target by 0.6 percentage points. The estimates reported suggest that the slope of the long-run Phillips curve is about 0.75. Then the average unemployment rate has been about 0.8 percentage points higher than if average inflation had been on target. This is a large unemployment cost of undershooting the inflation target. (JEL D84, E24, E31, E52, E58)

Citation

Svensson, Lars E O. 2015. "The Possible Unemployment Cost of Average Inflation below a Credible Target." American Economic Journal: Macroeconomics, 7 (1): 258-96. DOI: 10.1257/mac.20130176

Additional Materials

JEL Classification

  • D84 Expectations; Speculations
  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E31 Price Level; Inflation; Deflation
  • E52 Monetary Policy
  • E58 Central Banks and Their Policies
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