ABSTRACT
The Phillips curve is an inverse relationship between the rate of unemployment and the rate of increase in money wages; as the rate of unemployment decreases, wage inflation increases. The Phillips curve aims at analyzing effects of unemployment on wage costs, while the economy fluctuates around its potential level. Policy prescription supposedly implied by the Phillips curve, that is trade-off between wage inflation and unemployment was widely used in the 1960s and 1970s in the developing world and in a few developed countries. With half-hearted measures and/or supply-side economics and/or faith on the Phillips trade-offs inflation becomes high and chronic. The Keynesian model implies a trade-off between inflation and unemployment, and the Phillips curve implied by the Keynesian model is downward sloping in the short-run, and vertical in the long-run. Insistence on Phillips trade-offs, with policy changes over time focusing on unemployment, then on inflation and later inflationary expectations catching up will cause Phillips curve shift and produce Phillips loops.
