As presented in international literature, some of these explanations are: de-anchoring inflationary expectations, the labor market slack, a lower natural rate of unemployment, changes in expectations regarding the real pay growth, the decoupling between growth and inflation, the role of global value chains 1  in keeping prices down, the role of migration in keeping wages down in the countries of destination, and others. While there is some truth in each and every of them, no alternative has been successfully suggested so far. I think that the Phillips Curve needs a reality-check. If we want to explain inflation, we need to make some adjustments to the Phillips curve. The following presentation is based on two working papers that I recently published with Center for European Policy Studies (CEPS)i, respectively and Global Labor Organization (GLO)ii. Three major changes are needed to the Phillips curve. First, we should work with observable variables only. The problem with econometric models which use non-observable variables is built-in: they tend to under-perform in bad times. Potential GDP is revised retroactively. The output gap depends on potential GDP. Plus, an economy can grow above its potential without being at its full employment (in particular, but not exclusively, in catching-up economies). Any measure of unemployment is controversial, given the impact of insufficiently accounted factors such as the underground economy, migration, inactivity, part-time employment. A nonobservable measure of unemployment, like NAIRU, is even more debatable. If Central Banks rest their decisions solely on such non-observable variables, they are at risk of getting them wrong.

The post-crisis Phillips Curve and its policy implications Liviu Voinea, Deputy Governor, National Bank of Romania Keynote address to the National Asset- Liability Management Europe, 2019 Summit, London, March 14th  Summary           The post-crisis Phillips curve makes 3 fundamental changes to the wage Philips curve: it uses observable variables only; it changes the paradigm from flow to stock; and it allows the curve to be non-stationary. We introduce the concept of a cumulative wage gap – meaning the cumulative gap between current wage and a peak reference wage value in the past. People relate to their peak gains in the past rather than to uncertain future gains. They judge their consumption decisions based on the relation between their current wages and their past wages, adjusted for inflation. The shape of the post-crisis Phillips Curve expresses the theoretical assumption that the inflation rate stays below its target until the cumulative real wage gap closes, and that it increases above its target when the cumulative real wage gap becomes positive. We test our hypothesis using data for 35 OECD countries for the period 1990-2017. We are able to confirm our hypothesis, as the coefficients have the expected sign and are statistically significant for the OECD panel as well as for most of the individual countries. Bottom-line, inflation depends on the cumulative wage gap: it does not increase close to or above its target level until the cumulative real wage gap is closed.