ABSTRACT OF PAPER
Title: Phelps 1967 vs. Phelps 1968: The Phillips-Curve Discussion at its Turning Point
Author: Schwarzer Johannes
In the second half of the 1960s the Phillips curve discussion reached its turning point insofar as the curve was more and more reinterpreted as an equilibrium relation with causality running from unexpected inflation to changes in the rate of unemployment instead of the original view which interpreted the curve as a disequilibrium relation. In the original view, changes in the rate of unemployment (and hence excess demand or excess supply on the labour market) were driving wages and prices. This change in the underlying causality which can be interpreted as the turning point in the Phillips curve debate will be discussed by taking a closer look at two contributions by Phelps (1967, 1968), which were published within a rather narrow time span. The 1967 contribution made use of the equilibrium interpretation to augment the static trade-off view by a time dimension and to explain why trading off inflation for unemployment can be reasonable even if there is no long-run trade-off. On the other hand, the 1968 paper switched back to the original disequilibrium view by taking into account various market imperfections, so that a positive equilibrium unemployment rate (frictional unemployment) can be explained by the individual reaction of economic agents to these imperfections. With respect to the motive of the policymaker to accept a higher rate of inflation, the 1967 contribution stands out, since it incorporates elements of the “old” dilemma-view of the Phillips curve. The policy conclusion nevertheless is different from the dilemma view, since not the lubricating role of inflation is being emphasised, but the short-run advantages of surprise inflation are in the focus of attention.
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