1. The PHILLIPS CURVE
Theory and Evidence

2. Justifying the Phillips Curve
Draw side-by-side diagrams of the AD/AS model and the Phillips Curve model
(The vertical axis on the AD/AS model can be inflation or price level)

3. AS2 AS1 PC2 AD2 PC1 AD1 Inflation Inflation (rate of change of prices)6% 4% 3%
PC2
AD2
PC1
AD1
U = 7%
U = 5% 5% 7%
National Income (Real GDP)
Unemployment

4. USA :

5. SRPC in the UK
1988 to 2010
Back & Forth!

6. Data: retrieved from a time series search http://www. statistics. gov
Unemployment rate
Inflation rate
Jan-Mar 1989
7.6 5
Apr-Jun 1989
7.2
5.3
Jul-Sep 1989
7.1
5.1
Oct-Dec 1989 7
5.5
Jan-Mar 1990
6.9
5.9
Apr-Jun 1990
6.7
Jul-Sep 1990
Oct-Dec 1990
7.5
7.9
Jan-Mar 1991 8
Apr-Jun 1991
8.7
8.4
Jul-Sep 1991
9.2
7.7
Oct-Dec 1991
9.5
Jan-Mar 19923
9.7
Apr-Jun 19923
9.8
4.3
Jul-Sep 19923
9.9
3.3
Oct-Dec 19923
10.4
2.7
Jan-Mar 19933
10.6
2.4
Apr-Jun 19933
Jul-Sep 19933
10.2
2.8
Oct-Dec 19933
Jan-Mar 19943
2.5
Apr-Jun 19943 2
Jul-Sep 19943
9.4
1.7
Oct-Dec 19943 9
1.8
Jan-Mar 1995
8.9
Apr-Jun 1995
Jul-Sep 1995
8.6
Oct-Dec 1995
8.3
2.9
Jan-Mar 1996
8.2
Apr-Jun 1996
Jul-Sep 1996
8.1
2.3
Oct-Dec 1996
7.8
Jan-Mar 1997
7.3
1.9
Apr-Jun 1997
1.6
Jul-Sep 1997
6.8
Oct-Dec 1997
6.5
Jan-Mar 1998
6.4
Apr-Jun 1998
6.3
Jul-Sep 1998
6.2
1.4
Oct-Dec 1998
6.1
Jan-Mar 1999
Apr-Jun 1999 6
Jul-Sep 1999
1.2
Oct-Dec 1999
5.8
1.1
Jan-Mar 2000
0.8
Apr-Jun 2000
0.6
Jul-Sep 2000
Oct-Dec 2000
5.2 1
Jan-Mar 2001
0.9
Apr-Jun 2001
1.5
Jul-Sep 2001
Oct-Dec 2001
Jan-Mar 2002
Apr-Jun 2002
Jul-Sep 2002
Oct-Dec 2002
Jan-Mar 2003
Apr-Jun 2003
1.3
Jul-Sep 2003
Oct-Dec 2003
4.9
Jan-Mar 2004
4.8
Apr-Jun 2004
Jul-Sep 2004
4.7
Oct-Dec 2004
Jan-Mar 2005
Apr-Jun 2005
Jul-Sep 2005
Oct-Dec 2005
2.1
Jan-Mar 2006
Apr-Jun 2006
Jul-Sep 2006
Oct-Dec 2006
Jan-Mar 2007
Apr-Jun 2007
5.4
2.6
Jul-Sep 2007
Oct-Dec 2007
Jan-Mar 2008
Apr-Jun 2008
3.4
Jul-Sep 2008
Oct-Dec 2008
3.9
Jan-Mar 2009 3
Apr-Jun 2009
Jul-Sep 2009
Oct-Dec 2009
Jan-Mar 2010
The quarterly SA data are available from Jan 1989 to March 2010, with a subset shown here.
We did try to lag the unemployment data since it is a lagging indicator, but the results were not significant.

12. Therefore in the UK there seems to be several Phillips Curves (each corresponding to a different level of inflationary expectations) rather than a fixed single curve

13. AS2 AS1 PC2 AD2 PC1 AD1 Inflation Inflation (rate of change of prices)6% 4% 3%
PC2
AD2
PC1
AD1
U = 7%
U = 5% 5% 7%
National Income (Real GDP)
Unemployment

14. In USA

15. Therefore there seems to be several Phillips Curves (each corresponding to a different level of inflationary expectations) rather than a fixed single curve.
If new-classical economic theory is right, in the LR, economies will automatically return to a vertical LRPC at the NRU

16. Shifts to right for higher inflationary expectations and/or higher NRU and then leftwards

17. So, what is the natural rate of unemployment and where is the LONG RUN Phillips Curve?
Is it as high as 8% or as low as 4%?
Since the SRPC has been both out and back in and then out again, should we conclude that the LRPC is just as unstable?
Can governments change the position of the LRPC?
More data needed to find out answers for other countries and time periods…..
to be continued!