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Phillips curve| Graph showing the relationship between percentage changes in wages and unemployment, and indicating that wages rise faster during periods of low unemployment as employers compete for labour. The implication is that there is a stable trade-off between inflation and unemployment, and that the dual objectives of low unemployment and low inflation are inconsistent. The concept has been widely questioned since the early 1960s because of the apparent instability of the relationship between wages and unemployment, and since then the Phillips curve has been widely regarded as misleading in its explanation of inflation. The curve was developed by the New Zealand-born British economist Alban William Phillips, who graphically plotted wage and unemployment changes between 1861 and 1957. |
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| Also, the NKPC implies that inflation depends on real marginal cost, and not directly on either the gap between actual output and potential output or the deviation of the current unemployment rate from the natural rate of unemployment, as is typical in traditional Phillips curves (Walsh 2003). Phillips curves, expectations of inflation and optimal employment over time. Sticky information yields the empirically-observed long lags of response of income to changes in monetary policy (Friedman (1948) and Romer and Romer (1989)); it is consistent with the surprisingly slow response of inflation to shocks found in estimates of Phillips Curves (Gordon (1997)); and it fails to yield the theoretical perversity in rational expectatio ns staggered contract models of deflationary policies that lead to increases, not decreases in output (Ball (1994)). |
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