An examination of U.S. Phillips curve nonlinearity and its relationship to the business cycle

We test for and model nonlinearity of the reduced-form U.S. Phillips curve using the smooth transition regression (STR) framework. We find evidence of two regimes: a “high inflation regime†associated with fast rising food and energy prices and a “low inflation regime†associated with slower rising or falling food and energy prices. This suggests that the U.S. Phillips curve varies asymmetrically over the business cycle. Particularly, the U.S. Phillips curve has a tendency to shift in and flatten towards the end of expansion periods and in recessions. This result implies that the non-accelerating inflation rate of unemployment (NAIRU) varies over the short-run or business cycle.