Imperfect Information, Composition of Demand Shocks, and the Flattening of the Phillips Curve

2026

Open publication workspace · Sign in to read the full PDF.

AI-generated summary

1) This paper explains the flattening of the Phillips curve by showing how firms' imperfect information about demand shocks and the increasing volatility of sector-specific shocks reduce inflation's sensitivity to economic activity.
2) * Examines how firms' inability to distinguish between aggregate and sector-specific demand changes leads to correlated expectations.
* Develops a model where higher sector-specific demand volatility flattens the Phillips curve.
* Empirically tests this prediction using Japanese firm-level data, finding that increased sector-specific demand volatility explains changes in the Phillips curve slope.
3) Imperfect information, Phillips curve, demand shocks, inflation dynamics, shock heterogeneity

Check the original publication for accuracy and context.