Phillips Curve

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Phillips Curve

A graph that supposedly shows the relationship between inflation and unemployment. It is conjectured that there is a simple trade-off between inflation and unemployment (high inflation and low unemployment, and low inflation and high unemployment). Named after A.W. Phillips. Obviously, the relation between these important macroeconomic variables is more complicated than this simple graph would suggest. For a modern treatment, see work of Robert Lucas.

Phillips Curve

A curve postulating an inverse relationship between inflation and unemployment. That is, the Phillips curve theorizes that when inflation is low, unemployment is high and vice versa. This was a predominant theory for much of the mid-20th century until stagflation (high unemployment and high inflation) began to occur in the 1970s. Few economists use the Phillips curve today though it is a component in Gordon's triangle model.
Phillips curveclick for a larger image
Fig. 142 Phillips curve.

Phillips curve

a curve depicting an empirical observation (based on the work of the British economist A. W. Phillips) of the relationship between the level of UNEMPLOYMENT and the rate of change of MONEY WAGES and, by inference, the rate of change of prices (INFLATION). Fig. 142 shows the rate of change of money wages/rate of inflation on the vertical axis and the rate of unemployment on the horizontal axis. The figure depicts an initial Phillips curve 1. Point X, where the Phillips curve intersects the horizontal axis, is the rate of unemployment consistent with stable prices - the so-called ‘non-accelerating inflation rate of unemployment’ (NAIRU), also referred to as the ‘NATURAL RATE OF UNEMPLOYMENT’. At levels of unemployment below point X, the inflation rate then starts to increase. Let us assume that initially the current rate of unemployment is A and that the current rate of inflation is C.

A fall in unemployment (from A to B in Fig. 142), resulting from an increase in the level of AGGREGATE DEMAND, brings about an acceleration in the rate of increase of money wages (from C to D), reflecting employers’ greater willingness to grant wage increases as the demand for their products expands. By contrast, rising unemployment and falling demand lead to a slowing down in the rate of increase of money wages. The ‘curve’ thus suggests that there is an inverse relationship (a ‘trade-off) between unemployment and DEMAND-PULL INFLATION. However, while there was strong empirical support for the Phillips curve relationship in the past, in the 1980s high unemployment and high inflation tended to co-exist (see STAGFLATION). This led to attempts to reformulate the Phillips curve to allow, for example, for the effect of price expectations on money wage increases. See EXPECTATIONS-ADJUSTED/AUGMENTED PHILLIPS CURVE.

More recently, the UK economy has experienced both lower unemployment and lower inflation, i.e. the Phillips curve has shifted inwards towards the origin and become less steep (Phillips curve 2 in Fig. 142). The explanation for this, it is suggested, is because of greater labour market flexibility, which has reduced ‘the natural rate of unemployment’ (to point Y in the figure) while a more stable monetary climate, through the government's commitment to an inflation rate target of no more than 2%, has reduced inflationary expectations. See OPTIMIZING,FIXED TARGETS, NEW AND OLD PARADIGM ECONOMICS.

References in periodicals archive ?
This section provides an example of how demand-side policy might affect aggregate supply through a shift in the Phillips curve. Using a simple model of NGDP targeting, we analyze how the rates of inflation and RGDP growth might respond to an economic shock if inflation following the shock were to cause a shift in the Phillips curve.
Figure 6 then presents three plots Phillips curves using our underemployment rates, against AWE total pay data averaged by quarter for the pre-recession (2001Q2 to 2008Q1), immediate post-recession (2009Q3 to 2013Q4) and later period (2014Q1 to 2017Q4).
The tightening of labor and product markets then raises inflation via the negative slope of the Phillips curve and possibly via some boost to inflation expectations.
In the following section, we critically evaluate the reforms undertaken within the Greek Adjustment Program vis-a-vis the reforms of the best practice countries based on estimated Phillips curves.
"Do Phillips Curves Conditionally Help to Forecast Inflation?" Federal Reserve Bank of Philadelphia, Working Paper no.
Are Phillips curves useful for forecasting inflation?
Macroeconomics and the Phillips Curve Myth, by James Forder, Oxford, Oxford University Press.
I take the conventional wisdom on wage Phillips curves to be a 1999 Brookings paper that Larry Katz and I wrote entitled, "The High-Pressure U.S.
If the relation is negative, as proclaimed by supporters of the Phillips curve, a possible increase in inflation might decrease the high level of unemployment in the country which, at the end of 2012, amounted to 45% and was one of the highest unemployment levels in the world.
When the central bank instead employs forward guidance, the decline in the output gap is substantially reduced, to -47 and -35 basis points with the flat and steep Phillips curves, respectively.
Roeger and Herz (2012) pointed out the difference between the backward and forward-looking Phillips curve concerning and the macroeconomic effects of monetary policy shocks.
Garrison (1988) use a vertical long-run Phillips curve and Hayekian triangles to illustrate two alternative explanations of dynamic monetary theory.