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The Swiss Phillips Curve

Summary:
On VoxEU, Stefan Gerlach reviews the case for tilting Phillips curves in Switzerland. Previous research had suggested that the Swiss Phillips curve had steepened in the second half of the 20th century. Gerlach estimates a Phillips curve model that includes lagged inflation, an output gap measure, and a measure of import price inflation. His model suggests several structural breaks: The first structural break occurs in 1936-37. The estimated Phillips curves indicate that inflation became much more inertial, as evidenced by the fact that the parameter on lagged inflation more than doubled. The second break occurs in 1970-71 … While the sensitivity of inflation to the output gap essentially doubles, other parameters are broadly unchanged. This impies that the Phillips curve steepened

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On VoxEU, Stefan Gerlach reviews the case for tilting Phillips curves in Switzerland.

Previous research had suggested that the Swiss Phillips curve had steepened in the second half of the 20th century. Gerlach estimates a Phillips curve model that includes lagged inflation, an output gap measure, and a measure of import price inflation. His model suggests several structural breaks:

The first structural break occurs in 1936-37. The estimated Phillips curves indicate that inflation became much more inertial, as evidenced by the fact that the parameter on lagged inflation more than doubled.

The second break occurs in 1970-71 … While the sensitivity of inflation to the output gap essentially doubles, other parameters are broadly unchanged. This impies that the Phillips curve steepened sharply in the 1970s.

The third break occurs in 1993-94 … The parameter on the output gap falls to zero and becomes insignificant. The parameter on lagged inflation also falls sharply and loses significance. This implies that between 1994 and 2015 inflation in Switzerland was insensitive to the output gap and displayed little persistence, and seems to have fluctuated only in response to changes in import prices.

Dirk Niepelt
Dirk Niepelt is Director of the Study Center Gerzensee and Professor at the University of Bern. A research fellow at the Centre for Economic Policy Research (CEPR, London), CESifo (Munich) research network member and member of the macroeconomic committee of the Verein für Socialpolitik, he served on the board of the Swiss Society of Economics and Statistics and was an invited professor at the University of Lausanne as well as a visiting professor at the Institute for International Economic Studies (IIES) at Stockholm University.

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