Flatter Phillips curve The policy response to the second development – a more globally integrated domestic economy and a potentially flatter Phillips curve – is less clear. We have insufficient evidence to say that the flattening of the Phillips curve is permanent rather than temporary. And we have not yet observed how wages and prices respond to a very tight capacity situation.
However, if this change is long lasting and New Zealand firms are increasingly integrated with global markets, then domestic ‘non-traded’ inflation may become less responsive to monetary policy changes. In the extreme case, New Zealand would be a fully open economy with all prices and wages set in international markets.