The PHILLIPS CURVE Theory and Evidence

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)

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

USA : 2000 - 2014

SRPC in the UK 1988 to 2010 Back & Forth!

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.

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

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

In USA

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

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

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!