Working Paper
An Anatomy of the Phillips Curve
The paper examines how the long-run inflation-unemployment tradeoff depends on the degree to which wage-price decisions are backward- versus forward-looking. When economic agents, facing time-contingent, staggered nominal contracts, have a positive rate of time preference, the current wage and price levels depend more heavily on past variables (e.g. past wages and prices) than on future variables. Consequently, the long-run Phillips curve becomes downward-sloping and, indeed, quit flat for plausible parameter values. This paper provides an intuitive account of how this long-run Phillips curve arises.
Key Words
- Forward- and Backward-Looking Wage-price Behavior
- Inflation-unemployment Tradeoff
- monetary policy
- Traditional and New Phillips Curve
- Wage-price staggering