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We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation during the Post-Covid period. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroskedasticity in inflation and inflation risk. Hence, our model can generate more sizeable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that the central bank faces a more severe trade-off between inflation and output stabilization when inflation is high.

Macroeconomics --- Economics: General --- Inflation --- Production and Operations Management --- Banks and Banking --- Economic Theory --- Money and Monetary Policy --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Price Level --- Deflation --- Business Fluctuations --- Cycles --- Prices, Business Fluctuations, and Cycles: Forecasting and Simulation --- Interest Rates: Determination, Term Structure, and Effects --- Macroeconomics: Production --- Agriculture: Aggregate Supply and Demand Analysis --- Prices --- Economic & financial crises & disasters --- Economics of specific sectors --- Banking --- Economic theory & philosophy --- Monetary economics --- Output gap --- Production --- Central bank policy rate --- Financial services --- Demand elasticity --- Economic theory --- Interest rate floor --- Monetary policy --- Currency crises --- Informal sector --- Economics --- Interest rates --- Elasticity --- Cuba