The hockey stick Phillips curve and the effective lower bound

Arbeitspapier

We show that if business cycles are driven by financial shocks, the interplay between the effective lower bound (ELB) and the costs of external financing can generate an additional supply-side channel, which causes a disconnect between inflation and output. In normal times, factor costs dominate firms' marginal costs and hence inflation; credit spreads and the nominal interest rate, which together constitute external financing costs, balance out in response to a financial shock. When nominal rates are constrained by the ELB, larger spreads can partly offset the effect of lower factor costs on firms' price setting. The Phillips curve is hence flat at the ELB, but features a positive slope in normal times and thus an overall hockey stick shape. This mechanism also weakens the effects of forward guidance on inflation, since such policy reduces spreads and thereby financing costs.

Angaben zum Objekt

• ISBN: 978-3-95729-865-2
• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Deutsche Bundesbank Discussion Paper ; No. 55/2021

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Existence and Stability Conditions of Equilibrium ; Computational Techniques; Simulation Modeling ; Price Level; Inflation; Deflation ; Business Fluctuations; Cycles ; Financial Markets and the Macroeconomy ; Monetary Policy ; Central Banks and Their Policies ; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
• Thema: Phillips curve ; financial frictions ; effective lower bound ; disinflation ; forward guidance

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Böhl, Gregor ; Lieberknecht, Philipp
• Ereignis: Veröffentlichung
• (wer): Deutsche Bundesbank
• (wo): Frankfurt a. M.
• (wann): 2021

Weitere Informationen

• Handle: http://hdl.handle.net/10419/248740
• Letzte Aktualisierung: 10.03.2025, 11:44 MEZ