PhillipsCurve - The Phillips Curve NAIRU etc The The...

The Phillips Curve, NAIRU, etc.
The Phillips Curve, NAIRU, etc.

The Natural Rate of
The Natural Rate of
Unemployment
Unemployment
and the Phillips Curve
and the Phillips Curve
circle5
The Phillips curve, based on the data above, shows a
negative relation between inflation and unemployment.
During the period 1900 to
1960 in the United
States, a low
unemployment rate was
typically associated with
a high inflation rate, and
a high unemployment
rate was typically
associated with a low or
negative inflation rate.
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THE PHILLIPS CURVE
THE PHILLIPS CURVE
From CEE,
http://www.econlib.org/library/Enc/PhillipsCurve.html
Source: Bureau of Labor Statistics.
Note: Inflation based on the Consumer Price Index.
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Phillips curve
Phillips curve
…
…
?
?
US (1993 – 2009) UK (1993 – 2009)
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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Unmpl GBR 10.39 9.65 8.70 8.15 7.12 6.30 6.02 5.53 5.10 5.19 5.04 4.77 4.79 5.41 5.42 5.49 5.43
Infl GBR 2.50 2.07 2.63 2.44 1.82 1.56 1.32 0.87 1.18 1.27 1.36 1.34 2.04 2.30 2.35 2.50 2.10
Unmpl USA 6.91 6.10 5.59 5.41 4.94 4.50 4.22 3.97 4.74 5.78 5.99 5.54 5.07 4.61 4.64 5.38 6.30
Infl USA 2.97 2.60 2.81 2.94 2.34 1.55 2.19 3.37 2.82 1.60 2.30 2.67 3.38 3.23 2.86 3.02 1.99

Inflation,
Inflation,
P
P
e
e
and
and
Unemployment
Unemployment
5
This AS relation can be rewritten to establish a
relation between inflation, expected inflation, and
the unemployment rate.
First, the function F , assumes the form:
P P F u z
e
= + ( ) ( , ) 1 μ
F u z z ( , ) = - + 1 α u
P P e = + - ( )( ) 1 1 μ α u+ z
Then, replace this function in the one above:

Inflation,
Inflation,
P
P
e
e
and
and
Unemployment
Unemployment
From
derive
◦ An increase in the expected inflation, π
e
, leads to an increase in
inflation , π .
◦ Given expected inflation π
e
, an increase in the markup, μ , or an
increase in the factors that affect wage determination, z, lead to an
increase in inflation π .