Regional data reveal flatter Phillips curve, highlight expectations
A new European Central Bank study using regional data from 11 euro area countries finds that the Phillips curve is flatter and largely shaped by inflation expectations. This suggests traditional demand-side policies have limited direct effects on inflation, underscoring the importance of anchoring expectations.
Unlocking Phillips curve insights with regional data
A new ECB study leverages a rich dataset of 168 NUTS-2 regions across 11 euro area countries from 1999 to 2023. Unlike previous country-level analyses, this regional approach provides substantially more data variation, which is crucial for identifying the relationship between inflation and economic slack.
By controlling for time-invariant regional characteristics and common euro area shocks, the study isolates region-specific dynamics.
Initial findings show a Phillips curve slope of -0.19, indicating that inflation still responds to changes in regional unemployment.
This estimate is significantly larger than the -0.01 slope found in comparable country-level studies, highlighting the value of granular regional data for a more accurate assessment of the Phillips curve.
Expectations flatten the Phillips curve
The Phillips curve relationship weakens considerably when national inflation expectations are included.
Accounting for professional forecasts reduces the inflation response by roughly one-third.
With broader country-time fixed effects, the estimated slope flattens from -0.19 to -0.02, approaching zero.
This highlights the central role of inflation expectations in shaping inflation dynamics and their importance for accurate Phillips curve estimation.
A flatter curve implies that economic activity changes have limited direct effects on inflation, reducing the effectiveness of interest rate adjustments via the demand channel.
Anchoring expectations through a credible monetary policy framework is thus essential for effective policy transmission.