Liviu Voinea: The post-crisis Phillips Curve and its policy implications

Keynote address by Mr Liviu Voinea, Deputy Governor of the National Bank of Romania, to the National Asset- Liability Management Europe 2019 Summit, London, 14 March 2019.

Central bank speech  | 
18 March 2019


  • The post-crisis Phillips curve makes 3 fundamental changes to the wage Philips curve: it uses observable variables only; it changes the paradigm from flow to stock; and it allows the curve to be non-stationary.

  • We introduce the concept of a cumulative wage gap - meaning the cumulative gap between current wage and a peak reference wage value in the past. People relate to their peak gains in the past rather than to uncertain future gains. They judge their consumption decisions based on the relation between their current wages and their past wages, adjusted for inflation.

  • The shape of the post-crisis Phillips Curve expresses the theoretical assumption that the inflation rate stays below its target until the cumulative real wage gap closes, and that it increases above its target when the cumulative real wage gap becomes positive.

  • We test our hypothesis using data for 35 OECD countries for the period 1990-2017. We are able to confirm our hypothesis, as the coefficients have the expected sign and are statistically significant for the OECD panel as well as for most of the individual countries.

  • Bottom-line, inflation depends on the cumulative wage gap: it does not increase close to or above its target level until the cumulative real wage gap is closed.

  • For Phillips Curve to work, the loss of welfare from a negative cumulative real wage gap has to be fully compensated first - as a stock measure, not as a flow.

  • The policy implication from this finding is that, for those countries which have not closed their cumulative real wage gap (most of the developed economies), inflation will remain subdued until they close their cumulative wage gap.

Distinguished guests,

I would like to thank the organizers, Central Banking, for inviting me to speak about a very topical issue: subdued inflation.

Inflation has been subdued in the post-crisis years, and the Phillips Curve has failed to explain it. It is probably the greatest mystery of the economic science in the last decade: where has the Phillips Curve gone?