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Lecture16+-+The+Phillips+Curve+and+Aggregate+Supply

Lecture16+-+The+Phillips+Curve+and+Aggregate+Supply -...

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Economics 100B: Macroeconomics The Phillips Curve and Aggregate Supply Reading: Mishkin - Chapter 11. C. Binder “Whose Expectations Augment the Phillips Curve?”, Working Paper , University of California, Berkeley (2013). E.S. Knotek, II, “How Useful is Okun’s Law?” Economic Review , Federal Reserve Bank of Kansas City, (Fourth Quarter, 2007). Introduction, Section I, and Section V, Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 1/ 36
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The Phillips Curve and Aggregate Supply Agenda: 1 The Phillips Curve: U = f 1 ( ). 2 Okun’s Law: U = f 2 ( Y ). 3 Aggregate Supply: Y = f 3 ( ) Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 2/ 36
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The Phillips Curve Casual empiricism of the relationship between inflation and unemployment. -5 0 5 10 15 60 70 80 90 00 10 RATE (%) TIME (year) Source: FRED / BLS CPI Inflation Unemployment Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 3/ 36
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The Phillips Curve Original form The Phillips curve is the inverse relationship between inflation and unemployment . When unemployment is unusually low, the demand for labor will exceed the supply of labor and wages will rise more quickly. Because wages are a major input into total costs, more rapidly rising wages leads to higher inflation. Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 4/ 36
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The Phillips Curve Empirical motivation based on data from 1960-1970 -2 0 2 4 6 8 10 12 14 3 4 5 6 7 8 9 10 INFLATION (%) UNEMPLOYMENT (%) 60-70 Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 5/ 36
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The Phillips Curve Direct extension to later time is problematic. -2 0 2 4 6 8 10 12 14 3 4 5 6 7 8 9 10 INFLATION (%) UNEMPLOYMENT (%) 60-70 Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 6/ 36
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The Phillips Curve Fed inflation-credibility issue, 1973 oil-price shock & Volker inflation fight. -2 0 2 4 6 8 10 12 14 3 4 5 6 7 8 9 10 INFLATION (%) UNEMPLOYMENT (%) 60-70 76-84 Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 7/ 36
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The Phillips Curve Fed inflation-fighting credibility restored. -2 0 2 4 6 8 10 12 14 3 4 5 6 7 8 9 10 INFLATION (%) UNEMPLOYMENT (%) 60-70 76-84 85-95 Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 8/ 36
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The Phillips Curve Natural rate of unemployment declines further? -2 0 2 4 6 8 10 12 14 3 4 5 6 7 8 9 10 INFLATION (%) UNEMPLOYMENT (%) 60-70 76-84 85-95 96-07 Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 9/ 36
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The Phillips Curve The financial crisis of 2008 and beyond. -2 0 2 4 6 8 10 12 14 3 4 5 6 7 8 9 10 INFLATION (%) UNEMPLOYMENT (%) 08-13 60-70 76-84 85-95 96-07 Lecture 16 – Phillips Curve & Aggregate Supply: R. J. Hawkins Econ 100B: Macroeconomics 10/ 36
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The Phillips Curve Early modification The Phillips curve also implies an inverse relationship between nominal wages and unemployment .
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