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Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective

  • Karanassou, Marika

    ()

    (Queen Mary, University of London)

  • Sala, Hector

    ()

    (Universitat Autònoma de Barcelona)

  • Snower, Dennis J.

    ()

    (Kiel Institute for the World Economy)

The conventional wisdom that inflation and unemployment are unrelated in the long-run implies that these phenomena can be analysed by separate branches of economics. The macro literature tries to explain inflation dynamics and estimates the NAIRU. The labour macro literature tries to explain unemployment dynamics and determine the real economic factors that drive the natural rate of unemployment. We show that the orthodox view that the New Keynesian Phillips curve is vertical in the long-run and that it cannot generate substantial inflation persistence relies on the implausible assumption of a zero interest rate. In the light of these results, we argue that a holistic framework is needed to jointly explain the evolution of inflation and unemployment.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2265.

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Length: 43 pages
Date of creation: Aug 2006
Date of revision:
Publication status: published: Journal of Economic Surveys, 2010, 24 (1), 1-51
Handle: RePEc:iza:izadps:dp2265
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