11. unemployment and inflation

11. unemployment and inflation - Unemployment and Ination 4...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Unemployment and In f ation 4November2010 1 Reading Chapter 12 of Abel/Bernanke/Croushore 2 Unemployment and In f ation Trade-o f : The Phillips Curve In an article published in 1958, using 100 years of data, A.W. Phillips showed a negative relationship between unemployment and nominal wage growth in Britain: In times of low unemployment, there tended to be rapid growth in nominal wage; in times of high unemployment, nominal wage growth tended to slow down considerably. Since then economists have generalized Phillips’ work by studying the relationship between unemployment and in f ation — the growth rate of all prices. In the 1950s and 1960s, many studies replicated Phillips’ results for other countries and time periods. The negative relationship between unemployment and in f ation is known as the Phillips curve. A striking example of a Phillips curve occurred in the U.S. during the 1960s. The policy implications of these F ndings were much debated. Initially, it was thought that the F ndings suggested that policymakers should be able to choose a particular point of unemployment and in f at ionfromtheg ivenmenuinthe Phillips curve. Indeed during the 1960s some economists argued that by ac- cepting a modest amount of in f ation, macroeconomic policymakers could keep the unemployment rate low inde F nitely. Since then the Phillips curve relation between in f ation and unemployment looked to have broken down all together. From the perspective of the Phillips curve the most puzzling period was the mid 1970s, during which there was high in f ation and high unemployment si- multaneously (stag
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Figure 1: The Phillips curve for the U.S. in the 1960s Figure 2: Unemployment and in f ation in the US, 1970—2005 2
Background image of page 2
Figure 3: Full—employment equilibrium: IS-LM 1. Why was there a Phillips curve relation historically? 2. Why did the relation break down in recent times? 3. Does the Phillips curve actually provide a menu of choices between unemploy- ment and in f ation from which policymakers can choose? 3 The Expectations—Augmented Phillips Curve Recall the Lucas’s supply curve in the money and price misconceptions theory, Y = Y + b ( P P e ) , where Y = Y if P = P e . Suppose that in year 0, P e =100 and that the initial nominal money supply, M 0 , happens to be at a level in which the IS-LM equilibrium is at Y = Y with P = 100 . The economy is in full—employment equilibrium. There could still be workers without jobs though — those in— between jobs and searching, new entrants into the labor market, etc. Call the unemployment rate that results the natural rate of unemployment, denoted as u.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 11

11. unemployment and inflation - Unemployment and Ination 4...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online