Beveridgean Phillips Curve: A New Perspective on Inflation and Unemployment

In a continuously evolving global economic landscape, new economic theories have emerged to explain the relationship between inflation and unemployment. A recent study published in NBER Working Papers, co-authored by Pascal Michaillat and Emmanuel Saez, introduces an updated version of the Phillips Curve known as the 'Beveridgean Phillips Curve'. This innovative approach provides a fresh perspective on economic dynamics, particularly regarding the response of inflation to unemployment, distinguishing itself from traditional neoclassical and Keynesian theories. According to the study, the Beveridgean Phillips Curve is based on a model of price-setting through directed search, where prices adjust in response to labor market slack rather than marginal costs. This new approach brings three crucial features that reflect current economic realities in the United States: first, inflation is controlled when unemployment hits the efficient level (the full-employment rate of unemployment - FERU), demonstrating the 'divine coincidence'. Second, the curve presents a decreasing and convex relationship between unemployment and inflation. This implies that the inflationary response is greater when the labor market is over-tightened than when it is underutilized. Third, changes in the Beveridge Curve affect the efficient level of unemployment directly, shifting the Phillips Curve accordingly. This study not only offers a new explanation for current economic dynamics but also contributes to a broader understanding of the Federal Reserve's dual mandate on inflation and employment. It suggests that the dual goals of the central bank are compatible and that the economy can find a 'soft landing' from an over-tightened labor market.