Monetary Union Stability: The Economics of the Phillips Curve: Formation of Inflation Expectations versus Incorporation of Inflation Expectations
AbstractThis paper examines the theory of the Phillips curve, focusing on the distinction between "formation" of inflation expectations and "incorporation" of inflation expectations. Phillips curve theory has largely focused on the former. Explaining the Phillips curve by reference to expectation formation keeps Phillips curve theory in the policy orbit of natural rate thinking where there is no welfare justification for higher inflation even if there is a permanent inflation - unemployment trade-off. Explaining the Phillips curve by reference to incorporation of inflation expectations breaks that orbit and provides a welfare economics rationale for Keynesian activist policies that reduce unemployment at the cost of higher inflation.
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Bibliographic InfoPaper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 4-2011.
Length: 33 pages
Date of creation: 2011
Date of revision:
Phillips curve; formation of inflation expectations; incorporation of inflation expectations; backward bending Phillips curve.;
Find related papers by JEL classification:
- E00 - Macroeconomics and Monetary Economics - - General - - - General
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-16 (All new papers)
- NEP-CBA-2011-04-16 (Central Banking)
- NEP-MAC-2011-04-16 (Macroeconomics)
- NEP-MON-2011-04-16 (Monetary Economics)
- NEP-PKE-2011-04-16 (Post Keynesian Economics)
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