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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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    References listed on IDEAS

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    1. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
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    6. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    7. Thomas Palley, 1997. "Does Inflation Grease the Wheels of Adjustment? New evidence from the US economy," International Review of Applied Economics, Taylor & Francis Journals, vol. 11(3), pages 387-398.
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    12. Palley, Thomas I, 1994. " Escalators and Elevators: A Phillips Curve for Keynesians," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(1), pages 111-116.
    13. Thomas I. Palley, 2003. "The Backward--Bending Phillips Curve And The Minimum Unemployment Rate Of Inflation: Wage Adjustment With Opportunistic Firms," Manchester School, University of Manchester, vol. 71(1), pages 35-50, January.
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    15. Thomas I. Palley, 1990. "A Theory of Downward Wage Rigidity: Job Commitment Costs, Replacement Costs, and Tacit Coordination," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 12(3), pages 466-486, March.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    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. 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.
    2. 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).

    More about this item

    Keywords

    Phillips curve; Inflation expectation formation; Incorporation of inflation expectations; Backward bending Phillips curve;

    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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