Is the Irish Phillips Curve broken?

Abstract

Contrary to the predictions of a traditional Phillips curve relationship, inflation in Ireland remained subdued in the decade following the 2008 financial crisis, despite improving labour market conditions. To examine this apparent puzzle, we test econometrically the relevance of the Phillips curve in Ireland. We find a significant role for domestic cyclical conditions. We investigate whether the Phillips curve may be non-linear and find some evidence that it is flatter when there are high excess capacities and turns steeper as economic slack is eliminated. However, forecasts from non-linear specifications do not systematically outperform forecasts from linear specifications.