The Phillips curve appears to be intact in Sweden
Economic Commentaries, News The relationship between resource utilisation and inflation, the so-called Phillips curve, has been increasingly called into question in recent years. However, an analysis of detailed firm-level data indicates that the relationship still applies. This is described in the Economic Commentary “The relationship between resource utilisation and inflation: a micro data perspective”.
Inflation normally rises when resource utilisation increases. In recent years, however, this relationship, which is known as the Phillips curve, has been increasingly called into question. Critics often claim that increased competition from foreign firms and technological innovations have changed the correlation. But one problem with aggregate analyses of the relationship is that monetary policy reacts to changes in resource utilisation to stabilise inflation. This can mean that the Phillips curve appears to have weakened at an aggregate level, despite remaining unchanged at the firm level.
The Economic Commentary “The relationship between resource utilisation and inflation: a micro data perspective” uses micro data from the National Institute of Economic Research’s Economic Tendency Survey and examines the Phillips curve at firm level. On the whole, the analysis shows that Swedish firms’ selling prices are strongly linked to their perception of resource utilisation and inflation expectations. The Phillips curve thus appears to be intact at the firm level.
By Erik Frohm, who works in the Monetary Policy Department at the Riksbank.
The Riksbank’s Economic Commentaries contain, for instance, short analyses and debate articles. The opinions expressed in Economic Commentaries are those of the authors and are not to be seen as the Riksbank’s view.