The Phillips Curve and an Assumed Unique Macroeconomic Equilibrium in Historical Context

Abstract

An early post-WWII debate concerned the most desirable demand and inflationary pressures at which to run the economy. Context was provided by Keynesian theory devoid of a full employment equilibrium and containing its mainly forgotten, but still relevant, microeconomic underpinnings. A major input came with the estimates provided by the original Phillips curve. The debate seemed to be rendered obsolete by the curve’s expectations-augmented version with its natural rate of unemployment, and associated unique equilibrium GDP, as the only values consistent with stable inflation. The current behavior of economies with the successful inflation targeting is inconsistent with this natural-rate view, but is consistent with evolutionary theory in which economies have a wide range of GDP-compatible stable inflation. Now the early post-WWII debates are seen not to be as misguided as they appeared to be when economists came to accept the assumptions implicit in the expectations-augmented Phillips curve.

Nonlinear models of the Phillips curve

“…Carlaw and Lipsey (2012) argue that as a wide range of unemployment rates is compatible with a stable inflation, the flattening of the curve is inconsistent with the strict natural rate hypothesis and, more generally, is at odds with the implications of ergodic equilibrium theories. On the contrary, it supports path-dependent historical models according to which, in the medium term, the economy evolves along a non-stationary path (Lipsey 2016). In addition, as Central Bank credibility increased and inflation expectations came to anchor to the target rate, the evidence in support of the accelerationist view (Friedman 1968) largely declined.…”