ABSTRACT
This chapter discusses the relationship between inflation and economic activity that were presented at a recent macroeconomics workshop organized by the Federal Reserve Bank of San Francisco and the Stanford Institute of Economic Policy Research. Finding different relationships between unemployment and inflation in different data sets suggests that the conventional downward-sloping Phillips curve is not a fundamental economic relationship and prompts a search for the features of the economy responsible for the changing patterns observed in the data. Ireland uses a well-known model of inflation due to Robert Barro and David Gordon. In the Barro-Gordon model, surprise inflation leads to reduction in the unemployment rate. An important assumption of this model is that the gap between the natural rate and the unemployment rate desired by policymakers varies positively with the natural rate.
