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The Phillips Curve as a Long-Run Phenomenon in a Macroeconomic Model with Complex Dynamics

Author

Listed:
  • Gerd Weinrich

    (University of Milan)

  • Luca Colombo

Abstract

After the presentation of the Phillips curve as an empirical regularity (Phillips [1958]) economists and policy makers alike have tried to exploit it for policy purposes. Even before the oil shocks in the seventies and early eighties this has had mixed success only. With the advent of ''stagflation'' the Phillips curve seemed to be definitely dead but nowadays a majority of economists seems to agree that an inverse relationship between inflation and unemployment holds as long as changes in output and prices are demand-driven. Stagflation occurs only when supply-side shocks occur. Recently, new explanations have been advanced both to investigate theoretically and estimate empirically the Phillips curve and to assess its potential for economic policy. (See for example the special issue of the Journal of Monetary Economics (Vol. 44, N.2, 1999) on ''The Return of the Phillips Curve''.) In the present paper we aim to contribute to this discussion by showing that the Phillips curve may be obtained as the image of a chaotic attractor of the state variables of a non-linear dynamical system describing the evolution of an economy. This has two important consequences: on the one hand the Phillips curve in our model is a true long-run phenomenon and, on the other, it cannot be used for policy purposes. Our model is based on an overlapping-generations non-tatonnement approach involving temporary equilibria with stochastic rationing in each period and price adjustment between successive periods. In this way we are able to obtain complex sequences of consistent allocations allowing for recurrent unemployment and inflation.

Suggested Citation

  • Gerd Weinrich & Luca Colombo, 2001. "The Phillips Curve as a Long-Run Phenomenon in a Macroeconomic Model with Complex Dynamics," CeNDEF Workshop Papers, January 2001 1B.3, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  • Handle: RePEc:ams:cdws01:1b.3
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    References listed on IDEAS

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    2. Angelo Baglioni, 2006. "Entry into a network industry: consumers’ expectations and firms’ pricing policies," DISCE - Quaderni dell'Istituto di Economia e Finanza ief69, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    3. Maria Flavia Ambrosanio & Massimo Bordignon & Floriana Cerniglia, 2010. "Constitutional Reforms, Fiscal Decentralization and Regional Fiscal Flows in Italy," Chapters, in: Núria Bosch & Marta Espasa & Albert Solé Ollé (ed.), The Political Economy of Inter-Regional Fiscal Flows, chapter 4, Edward Elgar Publishing.
    4. Luca Colombo & Herbert Dawid & Kordian Kabus, 2012. "When do thick venture capital markets foster innovation? An evolutionary analysis," Journal of Evolutionary Economics, Springer, vol. 22(1), pages 79-108, January.
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    6. Baglioni, Angelo & Monticini, Andrea, 2010. "The intraday interest rate under a liquidity crisis: The case of August 2007," Economics Letters, Elsevier, vol. 107(2), pages 198-200, May.
    7. Gerd Weinrich & Luca Colombo, 2003. "Unemployment and Inventories in the Business Cycle," Computing in Economics and Finance 2003 156, Society for Computational Economics.
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    11. Andrea Vaona, 2015. "Anomalous empirical evidence on money long-run super-neutrality and the vertical long-run Phillips curve," Working Papers 17/2015, University of Verona, Department of Economics.
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    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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