But Friedman (1968) also framed an argument for a downward-sloping short-run Phillips curve
with a negative trade-off between inflation and unemployment, which became vertical in the long run.
The Phillips curve
is coming back to life and the latest pickup in wage growth is only the beginning.
The Phillips curve
stipulates that when unemployment is above the NAIRU, inflation will decrease one year later.
Some inflation-forecasting models based on the Phillips curve
suggest that there should have been more disinflation since the Great Recession than has shown up in core PCE or core CPI data.
We remember the 1960s as a halcyon economic decade with low unemployment and steady economic growth that Keynesians largely attributed to the sagacity of the central bank and its exploitation of the Phillips Curve
Part III looks at the study of booms, recessions, and the rise and fall of inflation in the short run, discusses the financial crisis and the Great Recession, introduces the IS curve, the interest rate, and the Phillips curve
, examines aggregate supply/aggregate demand (AS/AD), and presents new material on DSGE models.
The debates about free reserves versus net-borrowed reserves, targets versus indicators, monetary versus fiscal policy, the Phillips Curve
, monetary aggregate targeting, and econometric modeling have come and gone within a decade or two.
Another way to put the point is this: A certain volume of aggregate demand will place the economy at a certain point on the aggregate supply (AS) curve relating output to price level or on the short-run Phillips curve
relating unemployment to inflation".
Though Rowley long admired Phillips as a person, the so-called Phillips Curve
represented much of what Rowley thought was wrong with macroeconomics.
Olivier Coibion, University of Texas, Austin and NBER, and Yuriy Gorodnichenko, University of California, Berkeley and NBER, "Is the Phillips Curve
Alive and Well After All?
The potential contribution of communication and commitment to improved monetary policy can be most easily appreciated in the canonical New Keynesian model that summarizes the behavior of producers, households, and a central bank with a Phillips curve
, an intertemporal substitution (IS) curve, the zero lower bound on interest rates, and a central bank loss function.
In this Case, the central bank seeks to minimize the following loss function subject to the standard Phillips Curve
and its belief that the public has static inflationary expectations: