The Phillips Curve in Australia in the Era of Inflation Targeting

Abstract

Australia, like many other countries, experienced an unexpected surge in inflation following the COVID‐19 pandemic. This has renewed interest in the Phillips curve because of its important implications for monetary policy. We estimate the price Phillips curve in the post‐inflation targeting period using the most recent state‐level data. Identification relies on variation in regional demand that policymakers do not aim to stabilize. After controlling for cost‐push shocks and equilibrium unemployment, we obtain a modest slope of the Phillips curve and, more importantly, we do not find any steepening of the Phillips curve in the post‐COVID period. Without correct identification, the post‐COVID Phillips curve would be steeper as documented for other countries including the United States. We also find that the slope gradually decreases with the level of unemployment.