Comment

Since Phillips (1958), economists have sought to estimate a Phillips curve relationship or a positive relation between inflation,pt, and ameasure of the output gap, xt. Although historically such a relationship could be easily detected, the Phillips curve appears to have flattened in the United Statesmore recently. Some authors have suggested that inflation does not depend on slack, that it is largely exogenous. This raises the key question: What changed? The answer to that question is critical for much of macroeconomics and in particular for monetary policy. With most central banks around the world seeking to stabilize inflation around a target level (e.g., 2% in the United States), it is crucial to understand the determinants of inflation and to knowwhether monetary policy can still affect inflation. Several potential explanations have been provided for the flattening of the Phillips curve. Some have suggested that structural changes in the economy in recent decades have played a significant role (e.g., Duca 2019). In many of models of sticky prices, more rigid prices than in the past or increases in market concentration and pricing power (De Loecker and Eeckhout 2017) could also result in a flattening of the Phillips curve. McLeay and Tenreyro argue instead that monetary policy itself is responsible for the flattening of the Phillips curve. The explanation is simple: If the central bank conducts optimal monetary policy, seeking to minimize deviations of inflation from target and output from potential output, then it should set its policy instruments to increase inflation when output is below potential and vice versa. It follows that optimal policy causes a negative correlation between inflation and the output gap. That negative correlation blurs in turn the positive correlation implied by the Phillips curve, so that in equilibrium, the correlation between