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The Art of the Phillips Curve
- The Phillips curve, a significant concept in modern macroeconomics, has been extensively covered in textbooks and relied upon by central banks worldwide.
- Originating from the work of A. W. Phillips, the curve initially showed an inverse correlation between wage inflation and unemployment rate.
- Early proponents like Samuelson and Solow expanded the model to include general price inflation and established a causal framework.
- Policymakers embraced the Phillips curve in the 1960s, aiming to balance inflation and unemployment.
- The 1970s saw the theory challenged by stagflation, leading to adjustments in the model to account for supply shocks and expectations.
- Critiques by Friedman and Phelps highlighted flaws, the model's reliance on expectations, and the natural rate of unemployment.
- The Phillips curve adapted to include expectations, leading to a short-run relationship but no long-run trade-off.
- Mainstream macroeconomics pivoted to incorporate critiques, reshaping the model while avoiding its fundamental rejection.
- Critics argue the Phillips curve has become un-falsifiable, akin to pseudo-science, due to constant adjustments to maintain validity.
- Despite its shortcomings, the enduring popularity of the Phillips curve persists in academia, policymaking, and economics circles.
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