The Phillips Curve looked like a policy menu. Now two teams are screaming different advice at you.
Jobs are dominating voter concern. Get unemployment below 4% or prepare for opposition.
Stronger demand may cut unemployment, but a tight labour market could accelerate wage and price pressure.
Your policy worked. The question is what you bought — and what it cost.
You haven't changed policy. Yet the unemployment gain is fading.
“Jobs are slipping again. Do something.”
“Another demand boost may restore jobs — but the inflation price could now be higher.”
Choose before the next data release.
Boost aggregate demand and fight the rise in unemployment.
Leave aggregate demand broadly unchanged and wait.
Reduce aggregate demand to attack inflation.
| Your record | Decision 1 | Decision 2 |
|---|---|---|
| Unemployment | ||
| Inflation |
Your previous choice changed unemployment. It didn't make the change permanent.
| Your record | Round 1 | Round 2 | Round 3 |
|---|---|---|---|
| Unemployment | |||
| Inflation |
Your three decisions produced different inflation rates. But unemployment kept drifting back towards roughly the same place.
Start with the trade-off you already trusted. Start with SRPC-1. Point A sits on the original short-run relationship policymakers thought they could exploit.
Workers and firms revise expected inflation. Wage and price setting changes. The economy is no longer on the original short-run curve.
Higher expected inflation shifts the short-run Phillips Curve upwards.
Expected inflation changes wage and price setting, shifting the economy from SRPC-1 to SRPC-2. The key point is that the short-run curve itself is no longer fixed.
Another surprise expansion can move the economy left again. But once expectations adjust again, unemployment returns to the same rate at still higher inflation.
Once expectations fully adjust, unemployment returns to the same underlying rate. The inflation rate can differ, but the long-run unemployment rate does not.
Points B and D have different inflation rates but the same unemployment rate. Connecting those fully adjusted positions gives the vertical LRPC at the NRU.
That underlying unemployment rate is the Natural Rate of Unemployment (NRU). Connecting the long-run positions gives a vertical Long-Run Phillips Curve.
The original Phillips Curve survives — but only as a short-run relationship.
Unexpected demand can temporarily move unemployment below its underlying rate.
Expected inflation catches up, shifting the short-run curve.
Unemployment returns to N. Repeating the trick changes inflation, not long-run unemployment.