Unemployment and Inflation: Facts, Theories, Puzzles and Policies

This paper has four objectives. First it seeks to review the facts about unemployment and inflation with an emphasis on putting recent experience into a longer-term perspective. Additionally, a review of the facts, although in themselves well-known, provides an accessible statement of those features of the world which, as a minimum condition, any acceptable theory must be able to explain. The second objective of the paper is to review the alternative explanations for the facts about the relationship between unemployment and inflation and to evaluate critically those alternatives partly in the light of their ability to explain the observed behaviour of unemployment and inflation and also, and very importantly, in the light of their consistency with other well-known facts about human behaviour which are embodied in all acceptable economic theories. The third objective is to identify and highlight puzzles and paradoxes present in the existing state of knowledge. Hopefully this will serve to put into sharp focus the ongoing research task in this area. Finally the paper analyses, in the light of the existing state of knowledge, the key alternative policy recommendations for dealing with the twin problems of unemployment and inflation.