EcoFin Research Papers

This paper revisits the Phillips Curve by incorporating financial volatility, investor sentiment, and moral valuation shocks as structural cost-push components within the New Keynesian Phillips Curve framework. While conventional explanations for the flattening of the inflation–slack relationship emphasize expectation anchoring, globalization, or labor market changes, we argue that financial market instability and sentiment-driven moral re-pricing systematically alter firms’ marginal costs and pricing behavior. Financial volatility raises external financing premia, tightens balance sheet constraints, and amplifies precautionary pricing, while sentiment and moral shocks reshape demand elasticities and equilibrium markups. Embedding these channels into a hybrid NKPC highlights a previously underexplored transmission mechanism through which financial and ethical perceptions influence inflation dynamics. The framework reconciles empirical instability in Phillips Curve estimates with observed episodes of inflation persistence during periods of weak real activity, suggesting that modern inflation is increasingly driven by non-traditional cost pressures rather than labor market slack alone.

Phillips Curve; Financial Volatility; Investor Sentiment; Moral Shocks; Inflation Dynamics.

E31, E44, E52, G12

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