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.