Editing Phillips curve (section)

==History==
[[File:Figure_1_from_Phillips_1958_paper.png|thumb|300px|The original curve drawn for pre-WW1 data]]
[[Bill Phillips (economist)|Bill Phillips]], a [[New Zealand]] born economist, wrote a paper in 1958 titled "The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957", which was published in the quarterly journal ''[[Economica]]''.<ref>{{cite journal |last=Phillips |first=A. W. |year=1958 |title=The Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861-1957 |journal=Economica |volume=25 |issue=100 |pages=283–299 |doi= 10.1111/j.1468-0335.1958.tb00003.x|doi-access=free }}</ref> In the paper Phillips describes how he observed an inverse relationship between money wage changes and unemployment in the British economy over the period examined. Similar patterns were found in other countries and in 1960 [[Paul Samuelson]] and [[Robert Solow]] took Phillips's work and made explicit the link between inflation and unemployment: when inflation was high, unemployment was low, and vice versa.<ref name="SamuelsonSolow1960" />

[[File:Phillips Curve.svg|Rate of Change of Wages against Unemployment, United Kingdom 1913–1948 from Phillips (1958)|thumb|200px]]

In the 1920s, an American economist [[Irving Fisher]] had noted this relationship between unemployment and prices. However, Phillips's original curve described the behavior of money wages.<ref>{{cite journal |last=Fisher |first=Irving |year=1973 |title=I discovered the Phillips curve: 'A statistical relation between unemployment and price changes' |journal=Journal of Political Economy |volume=81 |issue=2 |pages=496–502 |doi= 10.1086/260048|jstor= 1830534|s2cid=154013344 }} Reprinted from 1926 edition of ''International Labour Review''.</ref>

In the years following Phillips's 1958 paper, many economists in advanced industrial countries believed that his results showed a permanently stable relationship between inflation and unemployment.{{citation needed|date=May 2014}} One implication of this was that governments could control unemployment and inflation with a [[Keynesian economics|Keynesian]] policy. They could tolerate a reasonably high inflation as this would lead to lower unemployment – there would be a [[trade-off]] between inflation and unemployment. For example, [[monetary policy]] and/or [[fiscal policy]] could be used to stimulate the economy, raising [[gross domestic product]] and lowering the unemployment rate. Moving along the Phillips curve, this would lead to a higher inflation rate, the cost of enjoying lower unemployment rates.{{citation needed|date=May 2014}} Economist [[James Forder]] disputes this history and argues that it is a 'Phillips curve myth' invented in the 1970s.<ref name="Forder">{{cite book |last1=Forder |first1=James |title=Macroeconomics and the Phillips Curve Myth |date=2014 |publisher=Oxford University Press |isbn=978-0-19-968365-9 |url=https://books.google.com/books?id=U0SZBAAAQBAJ }}</ref>

Since 1974, seven Nobel Prizes have been given to economists for, among other things, work critical of some variations of the Phillips curve. Some of this criticism is based on the United States' experience during the 1970s, which had periods of high unemployment and high inflation at the same time. The authors receiving those prizes include [[Thomas Sargent]], [[Christopher Sims]], [[Edmund Phelps]], [[Edward Prescott]], [[Robert A. Mundell]], [[Robert E. Lucas]], [[Milton Friedman]], and [[F.A. Hayek]].<ref>{{cite magazine|url=https://www.forbes.com/sites/briandomitrovic/2011/10/10/the-economics-nobel-goes-to-sargent-sims-attackers-of-the-phillips-curve/|title=The Economics Nobel Goes to Sargent & Sims: Attackers of the Phillips Curve|last=Domitrovic|first=Brain|date=10 October 2011|magazine=Forbes.com|access-date=12 October 2011}}</ref>

===Stagflation===
In the 1970s, many countries experienced high levels of both inflation and unemployment also known as [[stagflation]]. Theories based on the Phillips curve suggested that this would not occur, and the curve came under attack from a group of economists headed by [[Milton Friedman]].<ref name="Krugman" /> Friedman argued that the Phillips curve relationship was only a short-run phenomenon. This followed eight years after Samuelson and Solow [1960] wrote "All of our discussion has been phrased in short-run terms, dealing with what might happen in the next few years.  It would be wrong, though, to think that our Figure 2 menu that related obtainable price and unemployment behavior will maintain its same shape in the longer run.  What we do in a policy way during the next few years might cause it to shift in a definite way."<ref name="SamuelsonSolow1960">{{cite journal |title=Analytical Aspects of Anti-Inflation Policy |first1=Paul A. |last1=Samuelson |first2=Robert M. |last2=Solow |journal=[[American Economic Review]] |volume=50 |issue=2 |year=1960 |pages=177–194 |jstor=1815021 }}</ref> As Samuelson and Solow had argued 8 years earlier, Friedman said that in the long run, workers and employers will take inflation into account, resulting in employment contracts that increase pay at rates near anticipated inflation. Unemployment would then begin to rise back to its previous level, but with higher inflation. This implies that over the longer-run there is no trade-off between inflation and unemployment. This is significant because it implies that [[central bank]]s should not set unemployment targets below the natural rate.<ref name=chang/>

More recent research suggests that there is a moderate trade-off between low-levels of inflation and unemployment. Work by [[George Akerlof]], [[William Dickens]], and [[George Perry (American economist)|George Perry]],<ref>{{cite journal |first1=George A. |last1=Akerlof |first2=William T. |last2=Dickens |first3=George L. |last3=Perry |title=Near-Rational Wage and Price Setting and the Long-Run Phillips Curve |journal=Brookings Papers on Economic Activity |volume=2000 |issue=1 |year=2000 |pages=1–60 |doi=10.1353/eca.2000.0001 |citeseerx=10.1.1.457.3874 |s2cid=14610294 }}</ref> implies that if inflation is reduced from two to zero percent, unemployment will be permanently increased by 1.5 percent because workers have a higher tolerance for real wage cuts than nominal ones. For example, a worker will more likely accept a wage increase of two percent when inflation is three percent, than a wage cut of one percent when the inflation rate is zero.

===Modern application===
[[File:U.S. Phillips Curve 2000 to 2013.png|thumb|right|U.S. inflation and unemployment 1/2000 to 8/2014]]
Most economists no longer use the Phillips curve in its original form because it was too simplistic.<ref name="hossfeld">Oliver Hossfeld (2010) [http://www.hhl.de/fileadmin/texte/publikationen/forschungspapiere/HOSSFELD_USMONEY_INFERWP_2010-4.pdf "US Money Demand, Monetary Overhang, and Inflation Prediction"] {{Webarchive|url=https://web.archive.org/web/20131113215511/http://www.hhl.de/fileadmin/texte/publikationen/forschungspapiere/HOSSFELD_USMONEY_INFERWP_2010-4.pdf |date=2013-11-13 }} ''International Network for Economic Research'' working paper no. 2010.4</ref> A cursory analysis of US inflation and unemployment data from 1953 to 1992 shows no single curve will fit the data, but there are three rough aggregations—1955–71, 1974–84, and 1985–92—each of which shows a general, downwards slope, but at three very different levels with the shifts occurring abruptly. The data for 1953–54 and 1972–73 do not group easily, and a more formal analysis posits up to five groups/curves over the period.<ref name=chang/>

However, modified forms of the Phillips curve that take inflationary expectations into account remain influential. The theory has several names, with some variation in its details, but all modern versions distinguish between short-run and long-run effects on unemployment. Modern Phillips curve models include both a short-run Phillips Curve and a long-run  Phillips Curve. This is because in the short run, there is generally an inverse relationship between inflation and the unemployment rate; as illustrated in the downward sloping short-run Phillips curve. In the long run, that relationship breaks down and the economy eventually returns to the natural rate of unemployment regardless of the inflation rate.<ref>{{Cite web|url=http://www.apeconreview.com/phillips-curve.html|title=AP Macroeconomics Review: Phillips Curve|last=Jacob|first=Reed|date=2016|website=APEconReview.com}}</ref>

The "short-run Phillips curve" is also called the "expectations-augmented Phillips curve", since it shifts up when inflationary expectations rise, [[Edmund Phelps]] and [[Milton Friedman]] argued. In the long run, this implies that monetary policy cannot affect unemployment, which adjusts back to its "[[natural rate of unemployment|natural rate]]", also called the "[[NAIRU]]".  The popular textbook of [[Olivier Blanchard|Blanchard]] gives a textbook presentation of the expectations-augmented Phillips curve.<ref>{{cite book |last=Blanchard |first=Olivier |title=Macroeconomics |publisher=Prentice Hall |edition=Second |year=2000 |isbn=978-0-13-013306-9 |pages=149–55 |url=https://books.google.com/books?id=Dxu3AAAAIAAJ&pg=PA149 }}</ref> 

An equation like the expectations-augmented Phillips curve also appears in many recent [[New Keynesian economics|New Keynesian]] [[dynamic stochastic general equilibrium]] models. As Keynes mentioned: "A Government has to remember, however, that even if a tax is not prohibited it may be unprofitable, and that a medium, rather than an extreme, imposition will yield the greatest gain".<ref>{{cite book |last1=Keynes |first1=John Maynard |title=Monetary Reform |date=1924 |publisher=Hancourt |location=New York |pages=54–55 |doi=10.1086/318607 }}</ref> In these [[macroeconomic model]]s with [[sticky (economics)|sticky prices]], there is a positive relation between the rate of inflation and the level of demand, and therefore a negative relation between the rate of inflation and the rate of unemployment. This relationship is often called the "New Keynesian Phillips curve".  Like the expectations-augmented Phillips curve, the New Keynesian Phillips curve implies that increased inflation can lower unemployment temporarily, but cannot lower it permanently. Two influential papers that incorporate a New Keynesian Phillips curve are [[Richard Clarida|Clarida]], [[Jordi Galí|Galí]], and [[Mark Gertler (economist)|Gertler]] (1999),<ref>{{cite journal |last=Clarida |first=Richard |author2=Galí, Jordi |author3=Gertler, Mark  |year=1999 |title=The science of monetary policy: a New-Keynesian perspective |journal=Journal of Economic Literature |volume=37 |issue=4 |pages=1661–1707 |doi= 10.1257/jel.37.4.1661|jstor= 2565488|hdl=10230/360 |url=http://repositori.upf.edu/bitstream/10230/360/1/356.pdf |hdl-access=free }}</ref> and [[Olivier Blanchard|Blanchard]] and [[Jordi Galí|Galí]] (2007).<ref>{{cite journal |last=Blanchard |first=Olivier |author2=Galí, Jordi |year=2007 |title=Real Wage Rigidities and the New Keynesian Model |journal=Journal of Money, Credit, and Banking |volume=39 |issue=s1 |pages=35–65 |doi=10.1111/j.1538-4616.2007.00015.x |hdl=1721.1/64018 |url=http://www.nber.org/papers/w11806.pdf }}</ref>