Authors: K. Lawler, Prof., ORCID iD 0000-002-3409-6755, University of Kuwait, Kuwait; A. Moscardini, Visiting Prof.
ORCID iD 0000-0003-4951-0848, University of Cardiff, UK; I. Pavlenko, Prof., ORCID iD 0000-0002-5687-778X, University of Warsaw, Poland; T. Vlasova, Visiting Research Fellow, ORCID iD 0000-0002-5000-6756, Northumbria University, UK.
Abstract: This paper develops a detailed case study of the Phillips Curve as it has evolved since Phillips classic work of 1958. An explicit narrative in the paper involves the evolution of the argument using economics and systems thinking, to develop underlying data generating models. These are shown to underpin the inverse relationship between inflation and unemployment in economics. The paper considers the political exigencies relating to the Great inflation of the 1970s and the Great Recession post 2008 in terms of interpretations of the Philips curve. The paper hypothesises that economic ideas have meaningful significance within the context of historical eras with concomitant political imperatives whence such notions become somnolent once crises have abated. This This historical narrative is implicit in the latest research reflections on Philips curves. A particularly useful finding is the relevance of systems thinking and systems dynamics to the interpretation of issues relating to aggregation problems in macroeconomics involving inflation and unemployment causal relationships. The paper concludes that seemingly moribund the Philips curve is alive may have been hibernating. Identifying the Phillips curve requires a wide range of variability of non-aggregative data streams. This allows the negative slope of the curve to be revealed, else the Philips curve slope is pushed towards the vertical plane. Endogenous central banking and inflation targeting intensifies this effect which is evident from a systems thinking /dynamics perspective.
Key words: Phillip’ Curve, Business Cycles, Economic issues, System Dynamics.
1st Revision: 10/08/2020
Accepted: 08/09/ 2020
1. Andrew Atkeson & Lee E. Ohanian, 2001. “Are Phillips curves useful for forecasting inflation?,”Quarterly Review, Federal Reserve Bank of Minneapolis. Vol. 25(Win), p. 2–11.
2. Ball L., 1994 ‘Credible Disinflation with Staggered Price setting’ American Economic review, 84, 282–289.
3. Barro R. J. and Gordon D.B., 1983. “A positive theory of monetary policy in a natural rate model.” Journal of Political Economy 91(4): 589–610.
4. Black, L. and Pemberton H., 2004. An Affluent Society? Britain’s Post-war ‘Golden Age’ Revisited.
5. Blanchard, O. (2007) Real Wage Rigidities and the New Keynesian Model Journal of Money, Credit and Banking. Wiley on line publishing
6. Blanchard, O, E Cerutti, and L Summers (2015), “Inflation and activity–Two explorations and their monetary policy implications.” NBER Working Paper 21726.
7. Bloch, L. 2013. “Entry of Firms and Cost of Disinflation in New Keynesian Models” Economic letters, 119 (3), 268–271.
8. Broadberry, S. and Crafts, N. 2003. “UK Productivity Performance from 1950 to 1979: A Restatement of the Broadberry-Crafts View” The Economic History Review, vol. 56, No. 4, pp. 718–35.
9. Calvo,G. 1983. “Staggered Contracts in a Utility-Maximizing Framework” Journal of Monetary Economics.
10. Cecchetti, S G, M Feroli, P Hooper, A K Kashyap, and K L Schoenholtz (2017), “Deflating Inflation Expectations: The Implications of
Inflation’s Simple Dynamics.” CEPR Discussion Paper 11925.
11. Choi, K., Jung, C., & Shambora, W. 2003. Macroeconomic Effects of Inflation Targeting Policy in New Zealand.
12. Clarida, R. H. 2019. “The Federal Reserve’s Review of Its Monetary Policy Strategy, Tools, and Communication Practices”, speech at “A Hot Economy: Sustainability and Trade-Offs”, San Francisco Federal Reserve Conference,
13. Clarida, R, J. and Gertler, M. 1999. “The science of monetary policy: a new Keynesian perspective.” Journal of Economic Literature 37(4):
14. Coyle, R.G., 2000. Qualitative and quantitative modelling in system dynamics: some research questions. System Dynamics Review Wiley online https://doi.org/10.1002/1099-1727(200023)16:3<225::AID-SDR195>3.0.CO;2-D
15. Dotsey, M, S Fujita, and T Stark (2017), “Do Phillips Curves Conditionally Help to Forecast Inflation?” Working Paper 17–26, Federal Reserve Bank of Philadelphia.
16. Dutton, D. 1997. British Politics Since 1945: The Rise, Fall and Rebirth of Consensus (2nd ed. Blackwell).
17. Fair, R. C. 2000. Testing the NAIRU model for the United States. The Review of Economics Federal Reserve Bank of Minneapolis Quarterly Review. Winter. pp. 211.
18. Feldstein, M. S. 1997. Chapter in NBER book Reducing Inflation: Motivation and Strategy Christina D. Romer and David H. Romer, Editors (p. 123 – 166)
19. Fitzgerald, T J, and Nicolini, J.P. 2014), “Is there a Stable Relationship Between Unemployment and Future Inflation? Evidence from US Cities”, Federal Reserve Bank of Minneapolis Research Department working paper 713. Annual Meeting of the American Economic Association. American Economic Review 58(1)
20. Friedman, M. 1968. “The Role of Monetary Policy,” American Economic Review, vol. 58, March, pp. 1-17. 1)
21. Fuhrer, J. and Moore, G. 1995. “Inflation Persistence,” Quarterly Journal of Economics, vol. 110
22. Ghali, K.H. 1999. Wage growth and the inflation process: A multivariate cointegration, Journal of Money Credit and Banking
23. Gordon, R.J. 1985. Understanding inflation in the 1980s. Brookings Papers in Economic
24. Hooper, P. Mishkin, F.S. and Sufi, A. 2019. “Prospects for Inflation in a High-Pressure Economy: Is the Phillips Curve Dead or is It Just Hibernating?”, paper presented at US Monetary Policy Forum, New York.
25. Irewole, O (2019), “Inflation and Unemployment Relationship: A Dynamic report of Nigeria and Mexico in the perspective of the Phillips Curve from 1991-2016” International Journal of New Economics and Social Science.
26. Kennedy, M., 2011.A Taxonomy of System Dynamics Models of Educational Pedagogic Issues. Proceedings of the System Dynamics
27. Kiley, M T 2015. “Low Inflation in the United States: A Summary of Recent Research”, FEDS Notes, Board of Governors of the Federal Reserve System.
28. Lawler, K. A. and Katos, A. V. 2005. Estimating inflation and Unemployment in the EU, a cointegration study; Department of economics working papers.
29. Lawler, K., Vlasova, T., Moscardini A, O. (2019) Using System Dynamics in Macroeconomics. Bulletin of Taras Shevchenko
30. Liung, G.M. and Box, G.P.E. 1978. On a measure of lack of fit in time series models London: Routledge.
31. Lowe, R. 1990. “The Second World War, consensus, and the foundation of the welfare state.” Twentieth Century British History 1#2 152–182.
32. Lucas, R. E. 1972a. Expectations and the Neutrality of Money”. Journal of Economic Theory. 4 (2): 103–24. CiteSeerX
33. Lucas, R. E. 1972b. Some International Evidence on Output–Inflation Trade-offs. American Economic Review 63(3): 326–34.
34. Lucas, R. E. 1972c. Econometric Testing of the Natural Rate Hypothesis. Econometrics of Price Determination: Conference, October 30–31, 1970, edited by Otto Eckstein. Washington, DC: Board of Governors of the Federal Reserve System..
35. Lucas, R. E. 1988.. On the Mechanics of Economic Development. Journal of Monetary Economics. 22(1): 3–42. doi:10.1016/0304-
36. Lucas, R. E. 1976. “Econometric Policy Evaluation: A Critique”. Carnegie-Rochester Conference Series on Public Policy.
37. Mankiw, G. 1983. ‘The Inexorable and Mysterious Trade-off Between Inflation and Unemployment.’ Royal Economic Society
38. Mankiw, G. and Rels, R. 2001. ‘Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve.’ Quarterly journal of economics, 117 (4), 1295-1328
39. McLear, M and Tenroyo, S. 2018. “Optimal Inflation and the Identification of the Phillips Curve”,
40. Mehra, Y. P. 1994. Wage growth and the inflation process: An empirical approach. In: B. Rao. ed. Cointegration for the applied economist. New York: St. Martin’s Press
41. Moscardini, A.O. Lawler.K 2020 Challenging the Current Economic Weltanschauung
42. Nalewaik, J. 2016. “Non-Linear Phillips Curves with Inflation Regime-Switching”, Finance and Economics discussion series 2016-078, Board of Governors of the Federal Reserve System.
43. O’Hara, G. 2007. “From dreams to disillusionment: economic and social planning in 1960s Britain” Palgrave Macmillan
44. Phillips, W. 1958. “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom”, Economica, New Series, Vol. 25
45. Phelps. E.S. 1967. Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time. Economica,34(135), new series, 254-281. doi:10.2307/2552025
46. Powell, J. 2018. “Monetary Policy and Risk Management at a Time of Low Inflation and Low Unemployment”, speech at “Revolution or Evolution? Re-examining Economic Paradigms”, 60th Annual Meeting of the National Association for Business Economics,
47. Richardson, G.P. 1999. “Feedback Thought in Social Science and Systems Theory”. System Dynamics Series. Pegasus Communications
48. Ritschel, D. “Consensus in the Post-war Period After 1945,” In David Loades, ed., Reader’s Guide to British History (2003) 1: 296–97.
49. Samuelson, P. A., and Solow, R. 1960. Analytical Aspects of Antiinflation Policy. American Economic Review, 50(2): 177–194.
50. Sargant, T J. 1971. “A Note on the Accelerationist Controversy”. Journal of Money, Credit and Banking. 3 (3): 721–725. doi:10.2307/1991369. JSTOR 1991369.
51. Sargant, T J. 1987. Macroeconomic Theory. New York: Academic Press.
52. Sargent, T J. & Wallace, N. 1973. “The Stability of Models of Money and Growth with Perfect Foresight”. Econometrica. 41 (6): doi:10.2307/1914034.
53. Schwarz, R. 1978. “Estimating the dimension of a model”. Annuals of Statistics. 6. pp. 461–464.
54. Smets, F. and Wouters, R. 2007. ‘Shocks and Frictions in US business cycle analysis: A Bayesian DSGE approach’ American Economic review, 97 (3), 586-606
55. Stiglitz, J. (1997) Reflections on the Natural Rate Hypothesis Journal of Economic Perspectives–Volume 11, Number 1–Winter 1997–Pages 3–10
56. Stiglitz, J. 2001. “Information and the Change in the paradigm in Economics”. Prize lecture. Columbia Business School
57. Stock, J, and M Watson (2009), “Phillips Curve Inflation Forecasts”, in Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Retrospective, Proceedings of the Federal Reserve Bank of Boston’s 2008 economic conference, MIT Press.
58. Tatliyer, M. 2017. “Inflation Targeting and The Need for a New Central Banking Framework “Journal of Post Keynesian Economics. Doi
59. Taylor, J. 1979. “Staggered Wage Setting in a Macro Model,” American Economic Review, Papers and Proceedings, Vol. 69, 108–113.
60. Toye, R. 2013. “From ‘Consensus’ to ‘Common Ground’: The Rhetoric of the Post-war Settlement and its Collapse,” Journal of Contemporary History.
61. Williams. 2006. The Phillips Curve in an Era of Well-Anchored Inflation Expectations -Federal Reserve Bank of San Francisco
62. Williamson, A. “The Bullock Report on Industrial Democracy and the Post-War Consensus.” Contemporary British History 30#1 (2016): 119–149.
63. Yellen, J L (2015), “Inflation Dynamics and Monetary Policy”, speech at the Philip Gamble Memorial Lecture, University of Massachusetts Amherst, 24 September.