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The US Phillips Curve
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The US Phillips Curve

Back to the ’60s?


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Editorial Rating

7

Qualities

  • Innovative
  • Inspiring

Recommendation

It has been a long-held article of faith among central bank policy makers that there is no such thing as a free lunch – because monetary policy that aims for lower unemployment will result in higher inflation. Crunching the numbers leads economist Olivier Blanchard to revisit a policy favorite of the 1960s, the Phillips Curve, and to offer a Mad Men twist to central bankers’ arsenals. He posits that a free lunch may be possible, at least for a while, as long as the economy resists the temptations of gluttony. getAbstract recommends this thought-provoking contribution to discussions on monetary policy to economists and financial services professionals.

Take-Aways

  • The policies the US Federal Reserve pursued in the 1960s and 1970s adhered to the principle of a trade-off between higher inflation and lower unemployment, as quantified by the Phillips Curve.
  • While the basic idea that low unemployment triggers inflationary pressure continues to hold true, the exact relationship between the two variables has evolved.
  • The influence of long-term inflation expectations has risen significantly since the 1970s, while past inflation only slightly influences long-term expectations of inflation.

About the Author

Olivier Blanchard, formerly research director at the International Monetary Fund, is a senior fellow at the Peterson Institute for International Economics.