Excerpt
June 2024, Paper: "Beaudry, Hou, and Portier (hereafter BHP) have written an excellent and provocative paper. Rather than attempt to comment on each element of the analysis, I will focus my discussion on two main claims. First, the paper makes an empirical case that a linear and flat Phillips curve can explain inflation during 2021-2023. Second, it provides a theory through which broad-based supply shocks change inflation expectations and hence inflation itself and fits this theory to the U.S. experience. I can state my bottom line succinctly up front. The paper makes a strong case that supply shocks can drive inflation expectations. I remain less convinced of the claim in the paper’s title that these forces are dominant in driving inflation and by implication that tight labor markets play a subordinate role. I structure my comment in the order of the paper. Section 1 reviews the New Keynesian Phillips Curve (NKPC). The theory motivates a few changes to the empirical exercise assessing non-linearity in the Phillips Curve slope, which I implement in section 2. While my perspective shares ingredients with existing work (Benigno and Eggertsson, 2023; Gagliardone and Gertler, 2023), this part of the comment contains some novel theoretical and empirical arguments. I conclude that the U.S. time series are perfectly consistent with a non-linear Phillips curve in which only very tight labor markets cause inflation, although I acknowledge that the time series lack the variation to make a stronger claim. Section 3 illustrates the main mechanics of the BHP model using a simplified version and offers some comments."