Andrea Cerrato, UC Berkeley Graduate Student, UC Berkeley Economics
Abstract: "We estimate the slope of the Phillips curve before and after Covid to quantify the extent to which US post-pandemic inflation is propelled by demand factors. To do so, we exploit cross-sectional variation in inflation and unemployment dynamics across US metropolitan areas, using a Bartik-like instrument to isolate demand-driven fluctuations in local unemployment rates. We specify a two-region New-Keynesian model to derive the slope of the aggregate Phillips curve from our MSA-level estimates. We find that the slope of the Phillips curve more than doubled after the pandemic, reaching its highest level since the mid-1970s. A simple back-of-the-envelope calculation implies that demand-driven economic recovery explains about 1/3 of the increase in inflation observed from March 2021 to June 2022. Not allowing the slope of the Phillips curve to change between before and after Covid makes the demand contribution to the rise in inflation not statistically different from zero."