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Monetary Union Stability: The Economics of the Phillips Curve: Formation of Inflation Expectations versus Incorporation of Inflation Expectations


  • Thomas I. Palley

    () (New America Foundation, Washington DC)


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

  • Thomas I. Palley, 2011. "Monetary Union Stability: The Economics of the Phillips Curve: Formation of Inflation Expectations versus Incorporation of Inflation Expectations," IMK Working Paper 4-2011, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  • Handle: RePEc:imk:wpaper:4-2011

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    References listed on IDEAS

    1. Hecq, Alain & Palm, Franz C & Urbain, Jean-Pierre, 2000. " Permanent-Transitory Decomposition in VAR Models with Cointegration and Common Cycles," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(4), pages 511-532, September.
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    Cited by:

    1. Leonardo Vera, 2014. "The Simple Post-Keynesian Monetary Policy Model: An Open Economy Approach," Review of Political Economy, Taylor & Francis Journals, vol. 26(4), pages 526-548, October.

    More about this item


    Phillips curve; formation of inflation expectations; 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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