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The Phillips Curve and the Tyranny of an Assumed Unique Macro Equilibrium

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    Abstract

    To make the argument that the behaviour of modern industrial economies since the 1990s is inconsistent with theories in which there is a unique ergodic macro equilibrium, the paper starts by reviewing both the early Keynesian theory in which there was no unique level of income to which the economy was inevitably drawn and the debate about the amount of demand pressure at which it was best of maintain the economy: high aggregate demand and some inflationary pressure or lower aggregate demand and a stable price level. It then covers the rise of the simple Phillips curve and its expectations-augmented version, which introduced into current macro theory a natural rate of unemployment (and its associated equilibrium level of national income). This rate was also a NAIRU, the only rate consistent with stable inflation. It is then argued that the current behaviour of many modern economies in which there is a credible policy to maintain a low and steady inflation rate is inconsistent with the existence of either a unique natural rate or a NAIRU but is consistent with evolutionary theory in which there is perpetual change driven by endogenous technological advance. Instead of a NAIRU evolutionary economies have a noninflationary band of unemployment (a NAIBU) indicating a range of unemployment and income over with the inflation rate is stable. The paper concludes with the observation that the great pre- Phillips curve debates of the 1950s that assumed that there was a range within which the economy could be run with varying pressures of demand, and varying amounts of unemployment and inflationary pressure, were not as silly as they were made to seem when both Keynesian and New Classical economists accepted the assumption of a perfectly

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    File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp13-12.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp13-12.

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    Length: 19
    Date of creation: Oct 2013
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    Handle: RePEc:sfu:sfudps:dp13-12

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    Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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    Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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    Related research

    Keywords: Natural rate of unemployment; NAIRU; NAIBU; inflation targeting; Phillips curve; evolutionary theory; equilibrium theory;

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    1. Freeman, Chris & Louca, Francisco, 2001. "As Time Goes By: From the Industrial Revolutions to the Information Revolution," OUP Catalogue, Oxford University Press, number 9780199241071, September.
    2. Kenneth Carlaw & Richard Lipsey, 2012. "Does history matter?: Empirical analysis of evolutionary versus stationary equilibrium views of the economy," Journal of Evolutionary Economics, Springer, vol. 22(4), pages 735-766, September.
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