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The economics of the Phillips curve: Formation of inflation expectations versus incorporation of inflation expectations

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  • Palley, Thomas

Abstract

This 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.

Suggested Citation

  • Palley, Thomas, 2012. "The economics of the Phillips curve: Formation of inflation expectations versus incorporation of inflation expectations," Structural Change and Economic Dynamics, Elsevier, vol. 23(3), pages 221-230.
    • Handle: RePEc:eee:streco:v:23:y:2012:i:3:p:221-230
    DOI: 10.1016/j.strueco.2012.02.003
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    1. Further thoughts on Phillips curves
      by Mainly Macro in Mainly Macro on 2014-07-18 13:57:00

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    Cited by:

    1. Yegnanew A. Shiferaw, 2023. "An Understanding of How GDP, Unemployment and Inflation Interact and Change across Time and Frequency," Economies, MDPI, vol. 11(5), pages 1-15, April.
    2. Mark Setterfield & Robert A. Blecker, 2022. "Structural change in the US Phillips curve, 1948-2021: the role of power and institutions," Working Papers 2201, New School for Social Research, Department of Economics.
    3. Bienert, Sven & Sebastian, Steffen P. & Just, Tobias, . "Niedrigzinsumfeld und die Auswirkungen auf die Immobilienwirtschaft," Beiträge zur Immobilienwirtschaft, University of Regensburg, Department of Economics, number 8, August.
    4. Andrew Phiri, 2018. "Pursuing the Philips curve in an African monarchy: A Swazi case study," Working Papers 1832, Department of Economics, Nelson Mandela University.
    5. Yang, Jinrui, 2020. "Are large national debt and ultra-low inflation harmful? —— S-shape Phillips curve: the inflation-unemployment relationship of a low profit rate model," MPRA Paper 104970, University Library of Munich, Germany.
    6. Phiri, Andrew, 2018. "Pursuing the Phillips curve in an African monarchy: The Swazi case," MPRA Paper 89199, University Library of Munich, Germany.
    7. Philipp Heimberger, 2021. "Do higher public debt levels reduce economic growth?," FMM Working Paper 74-2021, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    8. Ricardo Summa & Julia Braga, 2020. "The (conflict-augmented) Phillips Curve is alive and well," Working Papers 0055, ASTRIL - Associazione Studi e Ricerche Interdisciplinari sul Lavoro.
    9. Dzmitry Kruk, 2016. "SVAR Approach for Extracting Inflation Expectations Given Severe Monetary Shocks: Evidence from Belarus," BEROC Working Paper Series 39, Belarusian Economic Research and Outreach Center (BEROC).
    10. Ricardo Summa & Julia Braga, 2020. "Two routes back to the old Phillips curve: the amended mainstream model and the conflict augmented alternative," Bulletin of Political Economy, Bulletin of Political Economy, vol. 14(1), pages 81-115, June.

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    More about this item

    Keywords

    Phillips curve; Inflation expectation formation; Incorporation of inflation expectations; Backward bending Phillips curve;
    All these keywords.

    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

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