The Phillips Curve Now and then

20 Pages Posted: 11 Apr 2011 Last revised: 11 Apr 2021

See all articles by Robert J. Gordon

Robert J. Gordon

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: June 1990

Abstract

This paper describes the development of the "triangle" model of inflation, which holds that the rate of inflation depends on inertia, demand. and supply. This model differs from most other versions of the Phillips curve by relating inflation directly to the level and rate of change of detrended real output, and by excluding wages, the unemployment rate, and any mention of "expectations." The model identifies the ultimate source of inflation as nominal GNP growth in excess of potential real output growth and implies that a policy rule that targets excess nominal GNP growth is an essential precondition to avoiding an acceleration of inflation, Any residual instability of inflation then depends on the severity of supply shocks. The textbook and econometric versions of the triangle model were developed simultaneously in the mid-1970s. Since then there have been two empirical validations for the U. S. of the model as estimated a decade ago. First, the "sacrifice" ratio of cumulative output loss relative to the decline in inflation during the business slump of the early 1980s was predicted accurately in advance. Second, the natural unemployment rate implied by the model's estimates predicted in advance the slow acceleration of inflation that occurred in began in 1987, when the unemployment rate fell below 6 percent.

Suggested Citation

Gordon, Robert J., The Phillips Curve Now and then (June 1990). NBER Working Paper No. w3393, Available at SSRN: https://ssrn.com/abstract=1806849

Robert J. Gordon (Contact Author)

Northwestern University - Department of Economics ( email )

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