Is the PHILLIPS CURVE still Alive???

Question

A friend of mine has asked me to post this question, because they would like to ascertain the answer. To be entirely honest I am not sure what the "Phillips Curve" is. It is something to do with economics and finance.

Answer 1

The old-school Phillips curve says that there's an inverse relationship between the unemployment rate and the inflation rate.

This relationship failed in the 1970s, because it failed to take into account expected inflation.

The new form is:

Inflation = Expected Inflation - scalar ( Unemployment Rate - Natural Unemployment Rate) + Price Shocks.

Answer 2

That's an interesting question, because the Phillips curve is not widely understood correctly.

Most non-economists will tell you the Phillips curve is the inverse relationship between inflation and unemployment. Actually, the original Phillips Curve (posited by one Dr. Phillips in the 1950s) posited that there exists an inverse relationship between the rate of change in wages and the rate of change in import prices in the U.K. His model was phenomenally accurate, and impressive considering he plotted 100 years' of data points in a curvilinear regression BY HAND.

A number of other "curves" followed immediately, during which time the understanding of the Phillips curve changed from the relationship between the rate of change in wages and the rate of change in import prices, and became inflation (rate of change in all prices) and unemployment. This was in part because consumption in the UK depended heavily on imported goods (being an island and all), and in part because the macro rationale underlying the Phillips curve didn't necessarily apply elsewhere.

As we understand it today, the Phillips curve works because of decreasing returns to scale in the labor markets as a whole. This means that hiring more labor past a certain point induces inflation because of inefficiencies and an "overheating" of the economy. Note that this explanation does not fit so well in the reverse, that high unemployment will lead to low inflation. Thus, it is not truly a curvilinear or inverse function - indeed, inflation is lowest at some long-run "Natural" rate, and idea promoted forcefully by Milton Friedman, Robert Lucas and the Chicago School. What we have found, instead, is that inflation can be very high when unemployment is ABOVE the "natural" rate.

There is statistical evidence, however, that the Phillips curve analysis applies in some nations, some time periods, and under some circumstances, but by no means everywhere.

What is interesting to note is that Japan's Phillips curve actually LOOKS like Japan.

Answer 3

1) What is the Phillips Curve?

The Phillips curve is supposed to show a direct relationship between unemployment and inflation. It works like this: as the economy heats up, unemployment goes down, but inflation rises. As the economy cools, unemployment rises and inflation falls.

The concept was used by the government to try and fine tune the economy and keep inflation under control and keep unemployment under control as well.

2) Is it still used today?

In the 1970s, the idea was destroyed by a phenomenon called stagflation. Inflation was very high and unemployment was very high. According to the Phillips curve, this could not happen, so the Phillips curve was widely discredited by economists.

However, most people are still taught the Phillips curve in high school because it is a simple way of understanding trade-offs in macro-economics. It is generally thought of as useless in the long-run, but still has some validity for the short term.

Answer 4

No. The Phillips curve has been somewhat discredited by recent economists looking at the natural rate of unemployment and discovering that when the rate of unemployment stays at a given level, other factors in the economy will shift, thus bringing inflation back to its natural level. Once expectations of inflation have changed, the level of unemployment is independent.

In the short term, the Phillips curve is still valid. In the long term, not so much.

Answer 5

The Philips Curve showed an inverse relationship between the rate of inflation and unemployment based on empirical observations during a particular period in certain countries. It was interpreted as: if the unemployment percentage falls beyond a certain point, the rate of inflation would tend to rise. And, vice versa.
However, as the western economies entered a period of both high/ rising unemployment and high/ risiing inflation
( referred to as Stagflation) , the Phillips curve could no longer remain valid. Theoretically, however, it is possible to still argue that under certain conditions, the Phillips curve may be valid in certain countries.

Answer 6

The Phillips curve has been revised in view that 1958 to comprise mixture furnish shocks and "envisioned inflation", which, even as watching it quantitatively is frequently plugged with previous 3 hundred and sixty 5 days inflation. This "envisioned inflation" in truth creates a tremendous comments loop; if people imagine there is going to be inflation, they run out and purchase issues NOW which in truth pushes mixture call for even more advantageous. the unique Phillips curve blanketed neither furnish shocks nor this envisioned inflation volume. to respond to your unique question, unemployment has been declining over the past couple years, that could advise that inflation should be heating up as a effect (as mixture call for starts off to outpace mixture furnish). Inflation HAS been choosing up. when it comes to a furnish wonder, this will strengthen the costs of production, that could strengthen both inflation as well as unemployment.

Answer 7

the phillips curve is not dead the principles of which it was created are still true but that doesn't mean country's can't have low inflation low unemployment like the uk does.

the phillips curve shows how inflation increases with the number of people employed.

Answer 8

No, I'm afraid not. She opened a bakery 12 yrs. ago and you wouldn't recognize her now. However, the Phillips SPHERE is alive and well!

Answer 9

"It is generally thought of as useless in the long-run,"

Of course. Unemployment is not a long run phenomenon.

Answer 10

Math is never dead.