From a Keynesian viewpoint, the Phillips curve should slope down so that higher unemployment means lower inflation, and vice versa. The Phillips Curve has finally been revealed as a stubborn old 1958â60 theory that cannot predict inflation but does predict that high inflation will end in high unemployment. Phillipsâs discovery that inflation is negatively correlated with unemployment served as a heuristic model for conducting monetary policy; but the flattening of the Phillips curve post-1970 has divided debate on this empirical relation into two camps: âThe Phillips curve is alive and well,â and âThe Phillips curve â¦ The US Phillips Curve: Back to the 60s? The Phillips curve depicts the inverse relationship between the levels of inflation and unemployment within an economy. He Our results also indicate that the Phillips curve may have been somewhat flatter between 2005 and 2013 than in the decade preceding that period. Keynesian economists, however, argue that the Phillips curve relationship offers policy makers a choice, at least in the short run, to increase inflation and lower unemployment. One of these indicators is the Phillips curve. Named for economist A. William Phillips, it indicates that wages tend â¦ Interpreting the Phillips curve as the inflation equation of our Bayesian VAR, we conclude that the US Phillips curve has been unstable. Olivier Blanchard Olivier Blanchard joined the Peterson Institute for International Economics as the fi rst C. Fred Bergsten Senior Fellow in October 2015. A Phillips curve shows the tradeoff between unemployment and inflation in an economy. Monetary policy can limit their impact on inflation by âleaning against the windâ to counteract their effects on economic activity, as well as on inflation. As shown in Figure 1(c) it is difficult to distinguish one single Phillips curve in the 1990s, instead, the curve seems to â¦ A.W. In 2008, he took a leave of absence to be the economic counselor and director of the Research Department of the International Monetary Fund. Phillips curve, graphic representation of the economic relationship between the rate of unemployment (or the rate of change of unemployment) and the rate of change of money wages. Not only do these indicators provide us with important individual measurements of economic health, but equally as informative is the relationship shown between these indicators. We have been here before â in the 1960s, similar low and stable inflation expectations led to the great inflation of the 1970s. both time -varying parameters and stochastic volatility. However, a downward-sloping Phillips curve is a short-term relationship that may shift after a few years. In this sense, the relation resembles more the Phillips curve of the 1960s than the accelerationist Phillips curve of the later period. This leaves us with two possible explanations: a flatter Phillips curve or improved monetary policy. We estimate the slope of the Phillips curve in the cross section of U.S. states using newly constructed state-level price indexes for non-tradeable goods back to 1978. (3) The slope of the Phillips curve, i.e., the effect of the unemployment rate on inflation given expected inflation, has substantially declined. (The relationship is known as the Phillips Curve after economist William Phillips who in the 1950s observed the connection between unemployment and wages in data for the United Kingdom.) The apparent flattening of the Phillips curve has led some to claim that it is dead. We distinguish the two by studying the dynamic effects of aggregate demand shocks. But the decline dates back to the 1980s rather than to the crisis. Our estimates indicate that the Phillips curve is very flat and was very flat even during the early 1980s. The column uses data from US states and metropolitan areas to suggest a steeper slope, with non-linearities in tight labour markets.