Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/231378 
Year of Publication: 
2021
Series/Report no.: 
IMFS Working Paper Series No. 153
Publisher: 
Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS), Frankfurt a. M.
Abstract: 
The recently observed disconnect between inflation and economic activity can be explained by the interplay between the zero lower bound (ZLB) and the costs of external financing. In normal times, credit spreads and the nominal interest rate balance out; factor costs dominate firms' marginal costs. When nominal rates are constrained, larger spreads can more than offset the effect of lower factor costs and induce only moderate inflation responses. The Phillips curve is hence flat at the ZLB, but features a positive slope in normal times and thus a hockey stick shape. Via this mechanism, forward guidance may induce deflationary effects.
Subjects: 
Phillips Curve
Financial Frictions
Zero Lower Bound
Disinflation
Forward Guidance
JEL: 
C62
C63
E31
E32
E44
E52
E58
E63
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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