Difference between revisions of "Phillips curve"
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The Phillips curve is a model for [[unemployment]] whereby increasing [[inflation]] supposedly reduces [[unemployment]]. The model of an inverse relation between the two is plotted with [[inflation]] on the y-axis and unemployment on the x-axis. | The Phillips curve is a model for [[unemployment]] whereby increasing [[inflation]] supposedly reduces [[unemployment]]. The model of an inverse relation between the two is plotted with [[inflation]] on the y-axis and unemployment on the x-axis. | ||
| − | [[Keynesian]] economists promoted the Phillips curve as a way of justifying increased inflation | + | [[Keynesian]] economists promoted the Phillips curve as a way of justifying increased inflation in order to reduce unemployment. [[Milton Friedman]], a critic of Keynesian economics, in 1968 demonstrated the fallacy of the Phillips curve, and correctly predicted "stagflation." Stagflation is the combination of high unemployment and inflation, and is impossible in the Phillips model, but it hit the economy hard in the late 1970s. Friedman persuasively argued that only when inflation exceeded expectations might it help reduce inflation. |
The Phillips curve was abandoned by the late 1970s, when inflation and unemployment were very high at the same time in the United States. | The Phillips curve was abandoned by the late 1970s, when inflation and unemployment were very high at the same time in the United States. | ||
Revision as of 07:42, May 26, 2009
The Phillips curve is a model for unemployment whereby increasing inflation supposedly reduces unemployment. The model of an inverse relation between the two is plotted with inflation on the y-axis and unemployment on the x-axis.
Keynesian economists promoted the Phillips curve as a way of justifying increased inflation in order to reduce unemployment. Milton Friedman, a critic of Keynesian economics, in 1968 demonstrated the fallacy of the Phillips curve, and correctly predicted "stagflation." Stagflation is the combination of high unemployment and inflation, and is impossible in the Phillips model, but it hit the economy hard in the late 1970s. Friedman persuasively argued that only when inflation exceeded expectations might it help reduce inflation.
The Phillips curve was abandoned by the late 1970s, when inflation and unemployment were very high at the same time in the United States.
Here is an algebraic formulation of the Phillips curve:
- <math> \Pi = \Pi_e - b(U-U_n) + v \,</math>
Plotting the inflation rate Π against unemployment U provides a downward-sloping Phillips curve.
