There is a relationship between inflation and unemployment that can be easily analysed. Governments around the world take this relationship very seriously, since there will always be a trade-off when implementing economic policies aiming either at reducing unemployment or keeping inflation at bay. Even though this relationship was first analysed by Alban William Housego Phillips in 1958, it has since evolved, taking into consideration adaptive and rational expectations.
In this Learning Path, we’ll learn about the Phillips curve and how expectations have made it evolve.
Early developments:
Phillips curve, which shows the relationship between inflation and unemployment;
NRU and NAIRU, two different views of the unemployment at equilibrium.
Monetarist view:
Adaptive expectations, using past expectations to form present ones;
Expectations augmented Phillips curve.
NCM’s view:
Rational expectations, introducing future predictions;
NCM’s view of the Phillips curve, a newer version.
