Monetary Policy when the Phillips Curve is Quite Flat

Title: Monetary Policy when the Phillips Curve is Quite Flat

Authors: Paul Beaudry (Bank of Canada), Chenyu Hou (Chinese University of Hong Kong) and Franck Portier (UCL)

Abstract: This papers begins by highlighting how the presence of a cost channel of monetary policy can offer new insights into the behavior of inflation when the Phillips curve is quite flat. For instance, we highlight a key condition whereby lax monetary policy can push the economy in a low inflation trap and we discuss how, under the same condition, standard policy rules for targeting inflation may need to be modified. In the second part of the paper we explore the empirical relevance of the conditions that give rise to these observations using US data. To this end, we present both (i) a wide set of estimates derived from single-equation estimation of the Phillips curve and (ii) estimates based on structural estimation of a full model. The results from both sets of empirical exercises strongly support the key condition we derived.