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| − | In [[economics]], the '''Phillips curve''' is a graphical representation of the idea that there exists an inverse relationship between [[inflation]] and [[unemployment]]. In a standard Phillips curve diagram, the [[inflation]] rate or [[price level]] is plotted on the vertical axis, and the rate of [[unemployment]] on the horizontal. | + | In [[economics]], the '''Phillips curve''' is a graphical representation of the idea that there exists an inverse relationship between [[inflation]] and [[unemployment]]. In a standard Phillips curve diagram, the [[inflation]] rate or price level is plotted on the vertical axis, and the rate of [[unemployment]] on the horizontal. |
| | [[File:NAIRU.png|right|280px]] | | [[File:NAIRU.png|right|280px]] |
| − | In the 1970s and 1980s, [[monetarists]] such as [[Milton Friedman]] argued that the Phillips curve was an example of the inability of [[Keynesian economics]] and demand-management policies to account for or address the phenomenon of supply-side (cost-push) [[inflation]] or "[[stagflation]]." In other words, supply-siders were of the belief that the model could not adequately describe inflation that resulted from sources other than excess [[demand]] in the [[economy]], such as [[exogenous]] [[supply]] shocks (sudden disruptions to [[supply]]). | + | In the 1970s and 1980s, monetarists such as [[Milton Friedman]] argued that the Phillips curve was an example of the inability of [[Keynesian economics]] and demand-management policies to account for or address the phenomenon of supply-side (cost-push) [[inflation]] or "[[stagflation]]." In other words, supply-siders were of the belief that the model could not adequately describe inflation that resulted from sources other than excess [[demand]] in the [[economy]], such as [[exogenous]] [[supply]] shocks (sudden disruptions to [[supply]]). |
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| − | The key problem, however, was primarily that the Phillips curve lacked a distinction between the [[short run]] and [[long run]] timeframes. As the accompanying diagram shows, changes in the structure of the [[economy]] (such as those caused by [[exogenous]] [[supply]] shocks) shift the short-run Phillips curve either up or down, such that any given level of [[unemployment]] corresponds to a higher or lower [[price level]]. According to this view, the inverse relationship between inflation and unemployment still holds, though the precise values of each that correspond to one another at any given short-run [[equilibrium]] may vary when supply side effects are at work. | + | The key problem, however, was primarily that the Phillips curve lacked a distinction between the [[short run]] and [[long run]] timeframes. As the accompanying diagram shows, changes in the structure of the [[economy]] (such as those caused by [[exogenous]] [[supply]] shocks) shift the short-run Phillips curve either up or down, such that any given level of [[unemployment]] corresponds to a higher or lower price level. According to this view, the inverse relationship between inflation and unemployment still holds, though the precise values of each that correspond to one another at any given short-run [[equilibrium]] may vary when supply side effects are at work. |
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| − | The Long-Run Phillips curve (LRPC) is drawn as a vertical line at the [[NAIRU]] (the Non-Accelerating Inflation Rate of Unemployment), and exemplifies the idea (adopted primarily by [[neoclassical]] economists) that in the [[long run]], the [[natural rate of unemployment]] will remain constant at the [[NAIRU]], though the corresponding rate of inflation may change over time.
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| | + | The Long-Run Phillips curve (LRPC) is drawn as a vertical line at the NAIRU (the Non-Accelerating Inflation Rate of Unemployment), and exemplifies the idea (adopted primarily by [[neoclassical]] economists) that in the [[long run]], the natural rate of unemployment will remain constant at the NAIRU, though the corresponding rate of inflation may change over time. |
| | + | <ref> |
| | + | == Anomaly in 2017 == |
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| | + | The lack of any correlation between the tightening labor market and inflation in 2017 suggests that the Phillips curve is not true. "Deflationary competitive pressures could have become more important for the overall trend in prices than the so-called Phillips Curve relationship, which links inflation to the state of the labor market. That model, coined almost 60 years ago, is the basis for the Fed’s outlook for continued gradual rate increases."<ref>https://www.bloomberg.com/news/articles/2017-06-20/amazon-has-at-least-one-fed-official-rethinking-inflation-theory</ref> Wage growth is a necessary component of inflation, and without wage growth a drop in unemployment seems insignificant in predicting inflation. |
| | [[Category:Economics]] | | [[Category:Economics]] |
| | + | [[category:finance]] |