Asymmetric price adjustment and the Phillips curve

Recent empirical work on the Phillips curve has focused on the convexity of the relationship between inflation and unemployment. In this paper we argue that another potentially important source of nonlinearity in the Phillips curve is to be found in asymmetric price adjustment. If prices rise more easily than they fall, then a threshold autoregressive specification seems a natural framework within which to re-examine the Phillips curve. We examine the Australian data used by a recent article on the Phillips curve and show that there are significant asymmetries in inflation, the Phillips curve and in the behavior of unit labor costs. (C) 2002 Elsevier Science Inc. All rights reserved.