Riksbank Economist Goes Looking for Phillips Curve and Finds It

(Bloomberg) -- Reports of the death of the Phillips curve might have been exaggerated, at least when looking at companies in Sweden, according to an economist at the country’s central bank.

The Phillips curve, broadly relationship between resource utilization and inflation, has been a hot topic between central bankers and economists since the financial crisis. With policy makers around the world struggling to bring back price growth, many have seriously started to doubt the relationship.

A new Economic Commentary from the Stockholm-based Riksbank, published on Thursday, argues that the relationship at least still applies at the firm level in Sweden. Based on company-level data from the Swedish National Institute of Economic Research, the study indicates that firms’ selling prices are strongly linked to their perception of resource utilization and inflation expectations.

Erik Frohm, who works in the Monetary Policy Department at the Riksbank, said that survey data from the NIER shows that firms with a higher resource utilization are more likely to respond that prices have increased.

While the argument goes that the correlation has weakened amid increased competition from foreign firms and technological innovations, the problem is that the aggregate analyses doesn’t take into account temporary underlying shocks, he wrote. Monetary policy can also react to changes in resource utilization, meaning that the Phillips curve appears to have weakened at an aggregate level while remaining unchanged at the firm level, according to the author.

“The micro data for firms used in this Economic Commentary can resolve some of these problems,” he said. “This is because monetary policy does not react to events in individual firms.”

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