What does the Phillips curve tell us?

The Phillips Curve describes the relationship between inflation and unemployment: Inflation is higher when unemployment is low and lower when unemployment is high. The original Phillips Curve formulation posited a simple relationship between wage growth and unemployment.

What causes the Phillips curve to shift?

The reason the short-run Phillips curve shifts is due to the changes in inflation expectations. Consequently, an attempt to decrease unemployment at the cost of higher inflation in the short run led to higher inflation and no change in unemployment in the long run.

Why is the Phillips curve wrong?

The underlying problem is that the Phillips curve misconstrues a supposed correlation between unemployment and inflation as a causal relation. In fact, it is changes in aggregate demand that cause changes in both unemployment and inflation. The Phillips curve continues to misinform policymakers and lead them astray.

What is the Phillips curve and what does it predict?

Finally, the authors demonstrate that the Phillips curve model can correctly predict the direction of change of future inflation about 60-70% of the time. By construction, the naive model offers no information about the direction of change of future inflation.

What are the advantages of the Phillips curve?

Some of the advantages of the Phillips curve are as follows: The problem of choosing the optimum level of inflation and un­employment combination can be solved using the Phillips curve as an optimum level of inflation and un­employment combination can be analyzed with the help of the indifference curve technique.

How did the Phillips curve get its name?

This trade-off is the so-called Phillips curve relationship. The Phillips curve is named after economist A.W. Phillips, who examined U.K. unemployment and wages from 1861-1957. Phillips found an inverse relationship between the level of unemployment and the rate of change in wages (i.e., wage inflation). 1

How is the position of the Phillips curve related to unemployment?

The position of the Phillips curve tells the initial magnitude of inflation – unemployment relationship. Using this theory it is shown that less inflation can be there only at the cost of the higher unemployment and the lower unemployment can be there only at the cost of the higher inflation.

How is the Phillips curve related to the NAIRU?

So in the long run, if expectations can adapt to changes in inflation rates then the long run Phillips curve resembles and vertical line at the NAIRU; monetary policy simply raises or lowers the inflation rate after market expectations have worked them selves out. 6  2