Phillips Curve

Understanding Phillips Curve

In 1958, A. W. Phillips found that years of low unemployment in the UK tended to have faster wage growth. Economists turned this into a trade-off between unemployment and inflation.

The 1970s showed the trade-off is not stable: when people expect higher inflation, the whole curve shifts up. The modern expectations-augmented Phillips curve says inflation depends on expected inflation and on how far unemployment is from its natural rate.

Formula

Here, $\pi$ is inflation, $\pi^{e}$ expected inflation, $u$ unemployment and $u_n$ the natural rate.