Can Phillips curve explain the recent behavior of inflation? Further evidence from USA and Canada

This paper explores the ability of the Phillips curve to forecast inflation over the course of the recent Great Recession. We use quarterly data for the USA and Canada for the period 1960Q1 through 2013Q4. Estimating the slope of the Phillips curve over a rolling 10-year (40-quarter) window, we find evidence in favor of its empirical instability for both countries. More precisely, our results suggest that the slope coefficient becomes smaller for the USA from 1980 and onwards, while it increases for Canada since 2000. We then simulate inflation for the period 2008Q1 to 2013Q4 and compare the results with those obtained from a standard, constant coefficient Phillips curve model. We conclude that modeling time variation of the slope parameter helps improve the accuracy of predictions for the USA, but not for Canada.